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Uralsib - Russia Equity Research - Sberbank - Could Have Even Been Better; 2009 IFRS review - Mar 18, 2010.

5% above consensus, exceptional losses added some pressure. Sberbank has just released neutral 2009 IFRS results. Net income dropped by 75% to RUB24.4 bln ($0.8 bln), which was 5% above the consensus, but 28% below our estimate, as we did not take account of the non-operating loss on non-current assets, which amounted to RUB18 bln ($ 0.6 bln) in 2009, representing a negative revaluation of premises and impairment of other assets. Without these losses, net income would have exceeded RUB40 bln ($1.3 bln) in 2009. At the same time, Sberbank demonstrated strong cost control, with its cost/income ratio at 34% in 4Q09, slightly up from 32% in 3Q09. As we expected, 4Q09 provision charges for loans and other assets ($3 bln) declined by 18% QoQ almost in line with our estimate. We see the results as largely neutral for the stock and believe the management outlook on net interest margin and other potential exceptional losses in 2010 should be at the center of investor's attention during the conference call today.

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Interest margin down, NPLs up, but marginally. As we expected, the company's net interest spread contracted by 60 bps QoQ in 4Q09 to 7% due to the lower profitability of working assets from the reduction in lending rates. NPL growth slowed substantially, as the NPL ratio grew just 60 bps QoQ to 8.5% at the end of 4Q09. The provisions/loans ratio increased to 10.7% from 8.9% in 3Q09, implying a comfortable coverage ratio of 1.2. We expect the trend to continue in 2010, although any pressure on the interest margin will be effectively offset by less provision charges and lending growth.

Best bet on a recovery. Remaining a proxy of the Russian economy, Sberbank is the best bet on a recovery in 2010, signs of which have become evident recently with a lower risk environment. Although credit activity remains sluggish so far, we expect banking sector profitability to improve substantially this year along with lending growth, to which Sberbank has good exposure. The bank is trading at a 2011E P/BV and 2011E P/E of 2.1 and 11.1, respectively, and we recommend to Buy shares of Sberbank, which have a target price of $3.6/common share.

URALSIB Capital, 8, Efremova St, Moscow, Russia,119048,


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Publication:Russian Banks and Brokers Reports
Date:Mar 18, 2010
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