Please Note: Blog posts are not selected, edited or screened by Seeking Alpha editors.

Sberbank Case For A Buyback/Buy.

|Includes: Sberbank of Russia ADR (SBRCY)

Summary

Sberbank is cheap and a good buyback candidate. A case for Buyback is also a case for a Buy.

Improving Russian economy.

Improving Company Accounts.

Financial Case.

I am a shareholder of Sberbank and have been for some time.

I bought some SBRCY shares at around $6 and have been buying on and of for some time.

I realize that the general strategy for Sberbank is to privatize the Company rather then increase government participation.

But considering its performance and potential performance why is there not a buyback program.

I urge you to have a serious buy back programme. For the following reasons.

Economic Case                        

 

  1. Significant improvement in Inflation. If prices remain flat the end of year inflation will be 1.6%. Don’t be shocked because 10/16, 11/16 & 12/16 had month on month inflation of 0.4, 0.4 and 0.6.If this is replaced by 0% for 10, 11, 12/17 you will have end of year inflation of 1.6%.
  2. Even if it comes to 2%.Nabiullina (CBR Head) will get cold sweat. CBR (Central Bank Russia) may have been too severe. Nabiullina will have to reduce interest rates. CBR was late to increase interest rates when inflation rose and is probably going to be late to cut back interest rates as inflation reduces. Oreshkin (Russia Economic Development Minister) is already warning about deflation. Election season is also coming Putin will be breathing down Nabiullina’s neck. To reduce the interest rate.
  3. With low inflation and interest rates Consumer confidence will improve and so will consumption.This will lead to higher borrowing which is always good for banks.
  4. As interest rates drop the price of most fixed income portfolio of the bank will rise generating more profits.
  5. Even its equity portfolio will rise as funding becomes easier and cheaper as interest rates drop.
  6. Central bank of Russia will probably reduce Interest rates to 8% on 27/10/17 otherwise it will really scramble later on in the year.
  7. I expect end of year interest rates at 6.5
  8. There are many other positives such as increasing Reserves, positive Trade balance, High oil prices, Low Government debt, low wages, Low unempolyment, positive Capital flows. 

For Russias economy a lot of Stars are lining up. 

Sberbank will benifit from Rising Tide lifts all Boats.

Accounting Case.

 

September RAS results have shown a net profit of almost $1.05b.

IFRS profits are usually even larger for the same period

My estimate for the next 12 months is a net profit of $15 b.

I am factoring the following things.

  1. Write backs as the economy stabilizes.
  2. Compounding of the profits.
  3. Move to safety as deposits move to Sberbank.
  4. Improving spreads/margins as deposit rates will move down faster as lending rates will be sticky and move down slowly.
  5. Opportunistic trading Sberbank can be choosy in buying distressed assets from closed banks. Considering improved future operating business conditions some of these assets may have turned the corner.
  6. The cost cutting and technology effects catch on.
  7. There are many performance positives for Sberbank such as high return on equity, assets. High reserves etc

Finacial case.

  1. The forward PE is 5 (75/15). Giving a return of 20%.  Compared to projected interest rate of 6.5% at end of year.
  2. 20% return beats both the CBR interest rates 6.5% & the lending rate  11%, it is more sensible to buy back stock then to lend money to consumers or corporate or government, the yield on buy back is simply better. 
  3. If the Government gets its way of dividend equal to half the profit. Dividend will equal to 10% compared to interest of 6.5%
  4. For Sberbank it is cheaper to borrow and pay interest for the buyback than to pay projected dividend. 

Sberbank should also have a buyback programe in place so that if there is a major correction in world markets Sberbank can take advantage by buying back its stock whose underlying fundamentals are sound though unrecognized.

The bank will also be sending a strong message that it believes in itself, its strategy, its corporate governance and its country if it invests in a buyback.   

The bank can sell back the shares and resume its privatization programe once its shares are reasonably priced.

The case for a buy back is so strong that even if you substitute my estimates with your estimates you will come to the same conclusion.

The management should seriously work on a buyback programe in any case I will keep buying.

Disclosure: I am/we are long SBRCY.