Russian Banks - 2020 Outlook: Some Profound Changes Emerging

If last year can be described as somewhat solid and undramatic for Russian banks, we think this year is shaping up to be a more interesting one in terms of some pretty profound structural changes that are underway. This notwithstanding, we expect a fairly good year for our covered banks, with earnings growth of about 10-20% set against an appealing domestic macro backdrop. As ever, we suggest being selective, and Tinkoff remains our top pick in the Russian banking space.> Profound changes underway. We see several important long-term changes underway for the banking sector. First, consistently low inflation and falling interest rates are sowing the seeds for longer-term NIM pressure (more a phenomenon in 2021 than this year) and will further enhance the need for banks to develop fee income in place of slowing net interest income (NII). Maximum average deposit rates among leading banks have just dipped below 6% for the first time - the Russian equity market now offers a similar yield - and this downward trend will also impact the way people save and invest, as evidenced by the doubling of retail brokerage accounts last year. Another important change is the fairly strong anticipated slowdown this year in the growth of unsecured lending, which has been a cash cow for banks. This will also feed into NII pressure, although the prospects for the mortgage market look upbeat. None of these changes are necessarily terminal problems for banks, but they will require innovation and better service, which ties into the trend of non-financial ecosystems being rolled out.> Banks likely to perform in line, but it still pays to differentiate. We think the jigsaw pieces point to a solid year for Russia's banking stocks, with decent earnings momentum (albeit not for all) against a feel-good macro backdrop. However, given the headwinds in unsecured lending and margins, we do not expect to see a material outperformance for banks relative to the Russian market as a whole. As ever, within this broad context, we would advise differentiation among stocks, with Tinkoff remaining our top pick (BUY; $27.25 TP), VTB (HOLD; $1.70 TP) still needing to show consistent delivery, and Bank of St Petersburg (BUY; R92 TP) hopefully shaking off a subdued showing in 2019.> Valuations are not challenging. While a material re-rating may be too much to ask, overall valuations (and possibly a lower cost of equity over time) should remain supportive for the investment case for leading Russian banks. Sberbank trades at a Bloomberg consensus 2020E P/E of 5.9, while Tinkoff trades at 6.7, VTB at 3.9 and Bank of St Petersburg at 2.9.