Moscow Exchange - Rising Rates Not Enough to Drive Outperformance

We raise our 2021-23 earnings forecasts by 3-6% per year on impressive fee income dynamics and higher interest rates boosting net interest income. This and higher peer multiples lead us to raise our target price by 7% to R192 per share, and we keep our HOLD recommendation. MOEX trades on a 5.9% 2021 dividend yield, well below the 10y OFZ yield (7%) and Sber's consensus dividend yield of 7.6%. We like the stock as a long-term play on the development of Russia's capital markets, but within the financials space we still prefer the powerful near-term earnings trajectory of the banks.> Fee income growth driven by two segments. Fee income growth has retained impressive momentum (17% y-o-y in 1Q21), and we raise our 2021 estimate to 15% (from 14%). This growth is being driven by two main segments - money market and depository and settlement - which between them contributed 47% of 1Q21 fee income (up from 44% in 2020), and we expect 15-20% y-o-y growth from both segments this year. Money market growth is being driven by increases in average repo terms, in part as market participants look to lock in rates in the rising rate environment. Depository and settlement is being led by safekeeping and clearing services, underpinned by continuing expansion of securities issuance, gains in the equity index, and increased foreign securities brought under custody. In the securities segment, we expect 25% y-o-y growth in equities trading volumes this year but fixed income volumes to contract by 13% given weaker new corporate issuance YTD. We see fee income growth slowing to 12% in 2022 and 11% in 2023.> Limited operating income sensitivity to rising rates. We have raised our 2021-22 NII forecasts by 7-15% due to the rising rate environment, assuming the key rate rises to 5.5% by end-2021. MOEX has about R200 bln in ruble funds, but this is likely to drop by around 10% during dividend season. Around one third of the ruble funds reprice quickly, with the remainder repricing over about two years. A rough sensitivity shows that each annualized 1 pp rise adds about R1 bln to NII, but this is only around 2% of our 2021 operating income estimate.> Opex pressures driven by staff costs. Staff costs have been growing at over 30% y-o-y over the past couple of quarters, albeit in part due to bonus reversals in 1Q20, but new hiring, wage rises and staff incentive plans are all important factors here. MOEX may be less impacted by the strong wage inflation for IT staff that banks in our space have reported, but it is also not immune to this trend. We raise our cost estimates by 6-9% per year, and expect an 11% 2021-23 costs CAGR. > Banks have more tailwinds within financials. MOEX has traded more or less in line with the Russian market YTD, and we don't see any near-term catalysts for that trend to change. While the stock remains a unique way of playing Russia's evolving capital markets story, the banks have stronger near-term earnings growth on diminishing credit risks, rising credit growth and some support for NIM from higher rates. We therefore favor banks within the financials space at this time. MOEX's dividend yield, while not bad, also looks relatively unexciting. We continue to use a combination of DDM and 12m forward P/E (14.6, based on EM exchange and bank peers) to value MOEX.