Daily analyst comments

On July 30 the Interfax news agency published data on key financial indices in the Russian banking sector. The report says Russia's 100 largest banks boosted their overall assets by 17% in the period to around USD 815 billion, compared to growth of 25% in the year-earlier period. The total portfolio of personal loans increased by 22% to USD 135 billion, after expanding by 24% in the same period last year. The overall pretax profits surged by 32% to USD 10.6 billion, after increasing by a more modest 21% a year earlier.

We are upbeat about the sector's performance in 1H 2008. A marginal slowdown in asset growth was anticipated by the market, and is linked with the sector's deeper penetration into the national economy. On the bright side, we point to the accelerating growth in pretax profits, from 21% to 32%, which was driven by strong demand for banking loans. Demand for loans grew due to restricted access to the bond market for a number of companies amid unfavorable price trends on financial markets and investors' aversion to risks. We believe that the data released testifies to the fundamental attractiveness of the Russian financial sector.

In our view, shares of Sberbank and VTB, the two main Russian 'state' banks, hold the largest upside potential in fundamental terms in view of their easy access to financing both at home and abroad. We reiterate our view that the 'state' banks are well placed to boost their market share amid the crisis on global credit markets.

Our target price for Sberbank is USD 5.26 per common share as of year-end 2009, with an upside of 77.1%, which corresponds to a BUY recommendation. The target price for the bank's preferred shares is USD 3.15 per share, with an upside potential of 80%, which corresponds to a BUY recommendation. The fair value of VTB should be USD 0.0054 per share, which implies an upside potential of 50% to the current stock valuations. Our recommendation is to BUY these shares too.