By Alexei Medved World Money Analyst Since my M

first_imgBy Alexei Medved, World Money Analyst Since my May column, the Russian market got hit badly. The popular US$ denominated RTS index fell 10.2% from 1489 to 1337. The developing financial crisis in Europe pushed investors into the “risk-off” mode, hence all risky assets were sold. This led to strong selling pressure on the Russian market as it is seen as high beta. A significant decline in the crude oil price also helped investors to justify selling Russian assets. As investors rushed into the perceived (perhaps wrongly so) safety of the US dollar, the USD/rouble exchange rate declined by about 6%, further magnifying the decline in the US$ prices for Russian equities. However, unless one believes that the oil price is headed lower and will stay low for a long time (a very unlikely scenario in our view), this correction could represent a good buying opportunity. We don’t know if the global market correction has bottomed or if continued weakness lay ahead. The Russian market could continue its descent should the global financial crisis persist. Also, don’t overlook the fact that Russian macro economic fundamentals remain strong. Inflation is down to a range of 6%, and GDP growth is projected at 4.9% in 2012. Foreign currency reserves are over US$500 billion, the world’s third largest after China and Japan. And the government debt-to-GDP ratio is under 10%, a welcome difference from highly indebted Western European countries and the USA. The Central Bank of Russia has enough flexibility to react to potential external shocks to the Russian economy, and to support its banking system in a stress scenario. Leveraged play on growth of the Russian economy Today, I will focus on the shares of a prominent Russian bank. Over the last 20 years, it has been transformed from the only savings bank in a country with a centrally planned economy, into a profit oriented institution with a greatly reduced headcount and significantly improved management. It remains majority government owned, but 40% of its equity trades on the Russian exchange and as an ADR on a Western exchange. There are concrete plans for the government to sell a part of its stake, possibly this year. The ADRs declined concurrent with the drop in the general markets, and shows that the market is not focused on the company’s underlying strength. This is a significant and unjustified sell-off, in our view, and represents a good buying opportunity. The bank’s fundamentals are very strong. The company has an extensive branch network in Russia and is funded primarily by customers’ deposits, rather than relying on wholesale funding (borrowing on the interbank market or issuing bonds) which led to problems for some Western banks. The bank is also very profitable. Based on recently published results, its Return on Equity, Return on Assets, and Net Operating Margin are all far superior to major Western banks. Profitable operations continue, with strong growth in lending and deposits. The company has a very strong capital position, with Tier 1 capital figures that compare favourably with major Western banks. The bank agreed to a large acquisition deal that will give it a footprint in a fast growing and profitable market outside Russia. Despite these strong fundamentals, the shares are trading at a mid-single-digit P/E and a low P/BV. These valuations represent a 34% discount to its Global Emerging Market peers and a 30% discount to the shares’ historical average valuations. In summary, this bank is a leveraged play on the Russian economy. If the economy does well, the shares are likely to appreciate significantly. At the same time, being a majority government controlled bank in Russia, should the global crisis deteriorate, and the Russian economy start having difficulties, the company is highly likely to receive support from the government and Russia’s Central Bank. To find out the name of the Russian bank and get the full analysis, as well as access to the WMA archives where you’ll learn about other international investing opportunities, take a 100% risk free test drive of the World Money Analyst. [Alexei Medved was born and raised in Russia and later moved to the West. He received an MBA from Wharton Business School and worked for a major global investment bank, where, from 1989, he developed the East European investment banking business. Since 1992, he has been running an independent business which concentrates on investments in Russia and the CIS.]last_img

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