Research Notes

The subprime market crisis in the US that destabilized global financial markets has led to the revaluation of risks and, consequently, a spike in the cost of borrowing. Against the backdrop of an expected decline in revenues at banks, the entire financial sector experienced major sell-offs. Be that as it may, in view of the latest actions and statements by the US Fed, we expect international capital markets to stabilize and maintain our optimistic stance on development prospects of the Russian banking sector in the mid- and long-term outlook.

According to our forecasts, Sberbank with a balanced internal funding base and some foreign loans payable will keep on improving its headline financials at a steady pace amid rising domestic demand for the full range of financial products.

We raised our year-end 2008 target price for the bank's common and preferred shares to $5.19 and $3.38, respectively, reiterating our Buy recommendation on the lender's commons and prefs.

Destabilization on the US mortgage market has sparked a substantial increase in the cost of borrowing on international markets. Be that as it may, taking into account the modest proportion of external funding sources in the national banking system's borrowing portfolio and the stable internal funding base, an upturn in funding sources will not be of overrriding importance. Meanwhile, we believe that deterioration on international debt markets will leave a trace and we expect a slowdown in the expansion rate of the Russian banking sector in the second half of 2007, forecasting annual growth of 32% in aggregate assets (the banking sector grew 22.5% in H107).

Despite robust expansion of the banking sector (aggregate increase in assets topped 44% in 2006), the pace of expansion of the Russian banking industry remains quite slow right now against East European countries: Russia's aggregate assets/GDP ratio is 52.4% compared to the average of over 100% in East European countries, while that for developed West European countries hovers in the range of 250-350%, which implies substantial growth potential of the Russian banking system.

Sberbank is the unrivalled leader in all segments of the national banking sector. At present, 25% of the aggregate assets and equity capital of the banking sector falls to Sberbank, slightly less that 29% of aggregate loans and more than 50% of private deposits. A diversified branch network (over 20,000 divisions) and the status of the "most reliable" Russian bank offer a considerable competitive advantage in rolling out and promoting banking products in the future.

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Vladimir Sergievskiy

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