Russian Banks - Connecting the Dots

In this uniquely challenging year, Russian banks made it through 1H20 in better shape than had been expected at the height of the lockdown. In this report, we try to connect the dots on the outlook going forward. We pick out 10 things we can learn from recent results and also take a look at what does and doesn't excite us about our covered stocks. We expect three of the four main traded banks (VTB being the exception) to post a H-o-H earnings improvement in 2H20, with TCS and BSPB looking on track to top last year's earnings. In the rather limited world of Russian banking stocks, our preferences and recommendations remain unchanged, albeit with some changes in target prices. TCS remains our top pick, and despite a strong stock price performance YTD, we think there is more in the tank. We retain a BUY on BSPB, although we see few near-term catalysts. Our HOLD on VTB reflects ongoing frustration at profitability that is weak and impacted by one-offs. Overall, we see the Russian economy in a gradual recovery mode, helped by low interest rates, but, as with the banks, the recovery is likely to encounter further bumps along the way. > Cautious optimism is the order of the day. Management guidance for 2H20 has generally implied expectations of further improvements in the operating outlook, but there are lots of moving parts. About 10% of sector loans have been restructured, with some hits already taken to P&Ls. Provisioning is likely to remain pretty elevated through the rest of this year. The revenue outlook is turning more benign as transactions and fee income recover, while some acceleration in lending should mitigate a bit of the margin pressure coming through from lower rates. The bottom line is that TCS and BSPB may grow earnings this year, with the large players, Sberbank (according to the consensus) and VTB, likely to see material earnings drops, but potentially strong rebounds in 2021. > TCS (BUY; TP: $28.75). The increasing diversity of TCS's online ecosystem has shone through in and after the lockdown, with customer acquisition, deposit flows, falling funding costs, the booming retail brokerage and profitable insurance all stepping up as payment revenues, loan growth has fallen and risk costs have gone up. We raise our 2020-22 net income forecasts by 39%, 12% and 2%, which implies that TCS can continue to deliver 30%+ ROE for a while to come. > VTB (HOLD, TP: $1.10). It is shaping up to be a pretty tough year for VTB, with earnings more than halving, driven by massive real estate write-downs. The positive is that earnings may rebound strongly in 2021, for which we are well ahead of the consensus, but it still only adds up to 10-11% ROE. There are few signs that long-held frustrations with VTB's operating performance are set to change anytime soon. This is a pain again felt through the slashed dividend. > Bank of St Petersburg (BUY; TP: R55). There is still just about enough here to retain a BUY given such lowly valuations, including very low funding costs, a strong mortgage business and improving digital offering, but we struggle to see near-term catalysts to excite investors.