Russian Banks - Time for Fee Income to Step Up

We look forward to a less eventful year for Russian banks in 2021, although as 2020 closes, our banks and their share prices are in much better shape than could have been imagined back in the summer. As a cyclical play on an economic recovery in 2021, the earnings outlook looks encouraging: 15-20% EPS growth is expected for TCS and BSPB and a more than doubling for VTB from a low base, and despite the 4Q20 rally, valuations don't look overstretched. Those in a position to capitalize on the increasing uptake of online banking, investments and payments, and which have diverse fee income streams to mitigate the inevitable NIM erosion, are poised to outperform. TCS ticks all these boxes and remains our top pick. > Banks in decent shape for 2021. We expect the economy to bounce back in 2021 with 3.5% GDP growth. We see potential for 25-50 bp of rate cuts, which could support credit growth and ease some of the NIM pain from lower loan yields. Though the restructured SME and corporate portfolios still pose some risks, all of our banks have decent macro provision buffers, which we think can be unwound in 2021. > Time for fee income to step up. We see 2021 as the year for players that have invested in digital infrastructure and services, and that can tap into changing consumer habits in banking, payments, and investments. Retail brokerage accounts doubled to over 8 mln in 2020, card payments for goods and services exceeded cash withdrawals for the first time, and e-commerce rose 35%. The question is who can monetize these changes through fee income, and the battle to offer subscription services beyond pure financial services will be an intriguing one to follow.> TCS (BUY; TP: $40.00). TCS looks to have the tools for success in 2021 and beyond. Its online model has been a powerful acquisition engine in this volatile year. It is the market leader in retail brokerage accounts, payments are gaining momentum and the SME business has proved resilient. We think 2021 will be a big year for fee income (+36% y-o-y), and, though NIM pressure will bite, we see loan growth rebounding (+23% y-o-y) to help NII. We expect an 18% 2021-23 earnings CAGR and earnings to hit $1 bln in 2023. A strategy update and possible MSCI main index inclusion are catalysts to watch in 1H21.> VTB (HOLD; TP: $1.20). Next year should be much better for VTB than 2020, with earnings more than doubling to R200 bln and a 50% dividend payout to finally return. Nevertheless, it still only adds up to an around 11% ROE and a 4% dividend yield. In addition, the management needs to prove that it can deliver after such a weak 2020. > Bank of St Petersburg (BUY; TP: R66). We expect 17% EPS growth in 2021 to follow a very respectable 15% in 2020. Stock liquidity has improved, there is now a decent dividend and low-double-digit ROE could become the new norm. At these valuation multiples, it's still a BUY.