Research Notes

Despite prevailing negativity in world credit markets, Sberbank, or the Saving Bank of Russia, has achieved sound financial results in 2007. But the Russian banking sector cannot shrug off external trends indefinitely and a slower pace of growth in this sector is the most likely scenario in our view. Our estimates show that the sector could be affected by a confluence of the following factors in the near future.

Drivers:

• A
• ctive integration of the financial sector into the economy. At present, the ratio between total banking assets and the country's GDP stands at 61%, compared to an average of above 100% for Eastern European countries, which is indicative of the Russian financial sector's potential for growth. The same figure for industrialized countries in the West ranges between 250% and 350%.
• Well-developed internal sources of funding. The bank is well placed to attract household deposits, owing to its extensive branch network and its identification as a ‘standard for reliability'.
• Access to foreign sources of funding. For the time being, large banks with a stable and balanced structure of liabilities find it much easier to attract finance from abroad.
• Russia's No.1 bank status. For most Russians, Sberbank remains the main provider of financial services, which ensures the bank a large client base.

Risks:

• Financial sector slowdown. Faced with scarce financing, banks will be forced to scale down their lending operations, despite steadily strong demand for debt finance within the country.
• Accelerating inflation. In all likelihood, combating inflation will be a priority task for the new government. As a side effect of this battle, the sector may have to ease its pace of growth and face increases in borrowing costs.
• Stiffer competition and weaker profit margins. As competition stiffens in the sector, we expect a gradual reduction in profit margins, including those of Sberbank.
• Uncontrollable growth in operating expenses. A 35% surge in the bank's opex in 2007 has led to an increase in its cost/income multiple to 55.4%. The bank's management does not expect serious cuts in the bank's opex in the near future.