Research Notes

PromStroyBank (St. Petersburg) is one of the Russian leading banks of the federal level, with a stable and diversified customer base and strong expansion rates. In 2004 the bank more than tripled its net profit and boosted assets by 50% which is a much stronger result than the banking sector average. The major upside factor for the bank's shares is the takeover of PSB by Russia's second-largest bank – Vneshtorgbank (VTB) – scheduled for the end of 2005 with a subsequent switch of the lending institutions to a single share.

Thus, PSB shareholders will get equity stakes in VTB whose shares have yet to be listed on the stock exchange, but could turn into a second blue chip in the banking sector after an IPO which the management of VTB intends to launch in 2006.

The likelihood of PromStroyBank to be taken over by one of the leaders in the national banking sector has already been largely priced in, which resulted in a spike in the bank's stock quotes since early summer. However, in our view, valuating PSB as a standalone business on fundamentals the bank's shares still hold some upside potential provided that the risks associated with its future takeover are reduced. Moreover, speculative interest in PSB shares could be maintained by the uncertainty about factors which will impact the acquisition price of a controlling stake in PSB and share swap ratios when switching PSB shares to those of VTB.

We assign a Hold recommendation to PSB shares with a fair price of $1.25 per common share.

Olga Belenkaya

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