VTB Capital: Sberbank - 3Q19; decent, but outlook increasingly blurred

Today, Sberbank reported earnings from continuing operations of RUB 230.8bn (+6.3% YoY, ROE 22.4%), 5.6% ahead of the consensus and in line with VTBC. Earnings were affected by the earlier guided one-off loss of RUB 73bn for the disposal of DenizBank. The 3Q19 numbers were again distorted by restructuring oil refinery-related exposures, weighting on NIM (-7bp QoQ) and CoR (92bp). Underlying trends were decent, with fee growth reaccelerating to 15% and underlying CoR of just 70bp. We estimate the implied Bloomberg consensus earnings estimates for 4Q19 are 10% below ours. However, the challenging 2020 outlook (NIM under pressure, limited room for CoR improvement) is in our view pivotal. We reiterate our 12-mo TP of RUB 390 (71% ETR) and Buy recommendation. We see the trigger for rerating being lower COE rather than earnings, as monetary policy in Russia normalises.3Q19 Operating trends. NIM dropped 7bp QoQ, which was well flagged after RAS numbers and was affected by the restructuring of oil refineries exposure. With the CBR making a bold, 50bp rate cut this month, we would expect an uptick in NIM in 4Q19, driven by deposit book repricing. Fee growth reaccelerated to 15% YoY in 3Q19 (+10% for 9mo19). Negative operating jaws persist, driven by one-offs; however, weaker volume growth, NIM pressure and tightening regulations on fees renders further operating leverage improvement challenging, in our view Balance sheet. The loan portfolio posted a 3.0% QoQ increase on the back of the solid consumer and SME loan growth (+6% QoQ). In retail, mortgage growth decelerated to 14% YoY, while unsecured consumer loan growth picked up to 25.6%, being in the final quarter before the regulatory tightening. Customer accounts were 2.3% higher QoQ, driven by inflows to corporate accounts. As a result, net LDR was up 1pp to 89%.Asset quality. The share of NPLs increased to 4.4%, from 4.0% in 2Q19 and 4.2% in 1Q19, with CoR in retail gradually rising, driven by credit cards. The coverage ratio declined to 152% as the share of provisions also declined QoQ, despite the hike in CoR 75bp to 92bp. Coverage of Stage 3+ POCI (7.9%) declined to 88% from 90.7% in 2Q19.Capital adequacy. CET1 capital was boosted 123bp by the disposal of DenizBank, with a 34bp negative charge from regulatory tightening. Still, it had reached 13.5%. RWA density even increased, to 101.8% in 3Q19.Conference call. Management is to host a conference call today at 15.00 UK time (dial-in: 1, ; conference ID: 7618312). We intend to focus on NIM sensitivity to lower rates, drivers for earnings growth in 2020 amid regulatory tightening and lower rates, the rationale for acquiring the stake in Mail.ru’s controlling shareholder, capital allocation.