Business / Banking

Wednesday, Apr. 10, 2002. Page 5

Sberbank Downgraded as Shares Rise

By Torrey Clark
Staff Writer

After soaring 400 percent since September 2001, Sberbank's shares were downgraded Tuesday from a buy recommendation to hold by a leading local investment bank, which warned that the retail banking giant's share price appreciation may have run its course.

Nonetheless, Sberbank's share price rose 3.2 percent to close at $156 on the Russian Trading System, in line with the market Tuesday.

Renaissance Capital downgraded its recommendation after Sberbank's shares reached the target price of $150.

"Sberbank at $30 or $40 did not reflect expectations of banking reform. Sberbank at $150 does," said Kim Iskyan, banking analyst at Renaissance Capital. "Investors should now look at the deeper issues that reform entails for Sberbank."

Other local investment banks had target prices ranging from $140 to a more optimistic $180. Troika Dialog said it was reviewing its target price of $147, and may downgrade its recommendation from strong buy to buy.

"In the near future, the share price is likely to consolidate in the range of $150 to $160," said Andrei Ivanov, analyst at Troika Dialog. "But we're likely to see an increase in liquidity and growth in the next 12 months."

"We're still optimistic on Sberbank. It is still one of cheapest banks in the world, trading at 4.2 times earnings and one times book," said William Browder, managing director of Hermitage Capital Management, which holds a stake in Sberbank. "But there are a lot of issues facing Sberbank before it can be valued like a properly managed Western bank."

Sberbank's share price has rocketed over the past six months as amendments to the joint stock company law enhanced minority shareholder protection and the economy expanded.

"Sberbank was cheap before because management was continuously organizing dilutive share issues. This practice became impossible after the JSC law came into effect on Jan. 1," Browder said. "Sberbank still has a long way to go to improve its own corporate governance."

As the only listed bank on the market, Sberbank also benefited from heightened expectations that banking sector reform would move forward -- and the resignation in March of former Central Bank Chairman Viktor Gerashchenko, seen as an obstacle to sector reform, brought cheers from analysts.

The actual steps taken to reform the sector could be a mixed bag for Sberbank. Measures such as the planned deposit guarantee system are intended to break Sberbank's monopoly hold on the retail sector. Sberbank itself, however, is unlikely to be broken into smaller units or privatized any time soon.

"As a result of banking reform, Sberbank will ultimately lose its monopoly status, and it will have to become a more efficient bank than it is today," Browder said.

"We need to understand if there will be reform before saying how it will influence Sberbank. If we look at what is planned now, there should be general improvement in the sector, but few specific changes for Sberbank," said Mikhail Matovnikov, deputy director of the Interfax Rating Agency.

Not all investors have found Sberbank attractive. Prosperity Capital Management, which oversees several of the best performing funds in Russia, has no near-term plans to invest in Sberbank.

"As credit expands and the economy does well, Sberbank could perform well because profitability is quite high. But as competition grows, they could lose market share and their credit quality could decline continually until they're not competitive at all," said Mattias Westman, director of Prosperity Capital Management. "Sberbank-like banks in all Eastern European economies ... without exception, either went bankrupt or needed a serious bailout at some point because they were not competitive."


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