Tag Archives: Adr

Emerging Markets: Sberbank ADRs (ISIN US80585Y3080)- Buying Russia in one stock

Warning: The stock discussed is very risky and the risk of a complete loss is high. In any case this should be seen at best as a very small part of a diversified Emerging Markets portfolio and in no case as a concentrated “bet”.

After a short visit in Hongkong, back to Russia, the currently cheapest Emerging market.

Sberbank is the largest publicly listed bank in Russia, with a market cap of around 32 bn EUR. As many Russian stocks, the stock price has suffered severely, especially if you look at the EUR price including the Rubel devaluation:

The current valuation looks attractive as with most Russian stocks:

P/E 4.2
P/B 0.8
Dividend yield 4,5%

Clearly, there are a lot of banks which have lower P/B Ratios, but Sberbank has, despite some volatility, shown ROEs of ~25% on average over the last 11 years (low: 3% in 2009, high 44% in 2001) combined with remarkable growth (in Ruble, EPS increased from 1 RUB in 2004 to 17, CAGR of 132%). This supports my thesis that banking in high interest rate countries is much more interesting than in low-interest rate environments.

What about current situation Russia ?

Standard and Poors just downgraded Russia from BBB to BBB-. This forced the Russian central bank to increase short-term rates from 7 to 7,5% after increasing it from 5% to 7% in March. Clearly, this will not support the currently weak economy in Russia.

And there is certainly a big risk that the situation in Russia and Ukraine gets worse. As with Sistema, the argument that it can get much worse before it gets better is clearly valid. Nevertheless, I think it will be difficult to really hit the bottom and as Mark Moebius has said “If you see the end of the tunnel it is already too late to invest”, I think investing when everyone expects worse to come is usually the better strategy with Emerging Markets.

What many people forget: Despite the big headline issues, from a financial point of view Russia looks very solid. Super low government debt (~15% of GDP), low consumer debt etc. Russia is a pretty “underleveraged” country, so the impact of devaluation, higher interest rates etc. on the economy are less significant than for instance in highly leveraged countries. Although certain Oligarchs may disagree for their personal portfolios….

Why a bank ?

Well, first of all, Sberbank is not a bank in Russia but the biggest bank of Russia. 52% of the voting rights are held by the Russian Central bank, so it is effectively Government controlled.

Investing into a bank is clearly a leveraged bet on the whole economy. If the economy tanks and debtors default, banks are getting hit hard. If the economy recovers, banks often profit strongly.

In Sberbanks case, I assume due to the ownership stake of the Russian Central bank that they will not have any funding problems in local currency. Clearly, getting dollars might be a little bit trickier, but Russia as a whole as Oil and commodity exporter should be USD positive.

Why Sberbank

Sberbank has quite good reporting in place including a brand new investor presentation. Interestingly, even in a 0% GDP growth scenario, they still project double-digit growth in loans.

The highlights of Sberbanks market position are:

+ 11x the number of branches of the next competitor
+ ~30-40% market share in all areas
+ one of the most profitable banks globally (ROA)

Clearly, there are also a lot of issues. Corporate Loan defaults could easily double or triple in a worst case scenario. Nevertheless, if they manage only a part of their ambitious goal (doubling their profit until 2018), the potential upside could be significant.

Other considerations

When looking at Russian companies, fraud, missing property rights etc. are always an issue. You can bet that in such a large organization like Sberbank a lot of fraudulent stuff is going on. On the other hand, es we have seen in 2008/2009 this is a general issue with banks in all jurisdictions. Sberbank has a history of fruads like this one or that one. Although if we compare that for instance with the two massive frauds at Citigroup’s Mexican subsidiaries it doesn’t look that spectacular.

Subjectively I would say that Sberbank is quite transparent compared to other Russian companies and that there were no obvious attempts to screw shareholders in the last few years.

One thing needs to be mentioned here: The Sberbank shares traded outside Russia are “ADRs”, American Deposit Receipts. I have no idea if somehow US authorities could seize those ADRs or do anything else to cause problems for ADR holders. I assume not as this would kill the ADR business but you never know.

Summary

Sberbank is stand alone not a “value investment” as there is clearly a risk of permanent loss in a very adverse scenario. However as a small part of an Emerging markets portfolio, I think it could be an interesting play on a normalization in Russia.

I will therefore invest a 1% portfolio position at around 5,80 EUR into Sberbank ADRs as part of my Emerging market basket (currently Sistema 1%, Koc 2,5%, Ashmore 2,5%).