Daily analyst comments

On September 17, the Central Bank implemented urgent measures aimed at bolstering liquidity in the Russian financial sector. The key measure taken provides for a decrease in the minimum reserve requirements. The requirements on ruble obligations to individual clients were slashed by more than 3x, from 5.5% to 1.5% and those on obligations to non-resident banks were cut from 8.5% to 4.5%. The other reserve requirements were decreased from 6.0% to 2.0%. The new reserve requirements will be effective from September 18, 2008, until February 1, 2009. After that, they will be increased by 2% and as of March 1, 2009, by another 2%.

The measures being taken make it possible to release about USD 11.75 billion, or RUB 300 billion, into the banking sector to ease its liquidity problems. In addition, all banks will get the opportunity to borrow funds directly from the CBR. This should help overcome the crisis of confidence among banks which currently refuse to credit each other, citing adverse market conditions. In our view, direct borrowing from the CBR will breathe new life into the interbank credit market and help settle liquidity problems in the banking sector.

The Finance Ministry has also decided to increase the amount of budgetary funds to be deposited with large state banks, Sberbank, VTB and Gazprombank. The terms of these deposits will be extended by 5x, from their present five week term, to three months. The cap on these funds will be lifted by 2.5x, from RUB 450 billion to RUB 1,126 billion, or from USD 17.6 billion to USD 44.2 billion. These measures offer a substantial support for the state banks.

We recommend that long-term investors BUY shares in the two largest state banks, Sberbank and VTB, as these are least subject to the ongoing crisis of confidence. Our target price for one common share in Sberbank is USD 5.26 as of year-end 2009, which implies an upside potential of 258% and corresponds to a BUY recommendation. Our target price of one preferred share in Sberbank is USD 3.15 as of year-end 2009, with an upside potential of 397%, which corresponds to a BUY recommendation. We estimate the fair value of one common share in VTB at USD 0.0049, with an upside of 355%. Investors are advised to BUY these shares too.