Why Russia is not like China

- China sneezes, Russia catches a cold.. but not for banks "With Russia analysis increasingly focused on second-guessing Chinese industrial policies, we were not surprised to be asked about the potential read-across from the Chinese banks stress-test for 60% real estate price falls. Our Chinese banking colleagues conclude this is a potential negative for the sector from an earnings perspective, but not a threat for book value. For Russia, we conclude that there is very limited read-across we can reasonably see:
• the Russian real estate market is at a different point in the cycle vs the Chinese property market as prices have already corrected and activity levels remain relatively subdued
• Russian banks’ mortgage exposure is much smaller, at 6% of gross loans (vs 11% in China) and only 2.5% of GDP (vs14.8%)
• Mortgage momentum remains subdued, with mortgage y/y growth finally in positive territory in May (but up 49% in China)
We look at CBR stress-tests, which were historically more concerned with market volatility (FX, bond, equity price moves), depressed macro environment & liquidity. With 12.4% of sector loans to real estate, including construction & developers, we show that brutal assumptions of 20-50% NPLs with 40-50% recoveries lead to losses equal to 20-22% of equity. Considering non RE collateral revaluations, this adds a shortfall equal to 13% of system loans."
- 2 sector catalysts: stabilising NIMs & volume growth "We continue to favour Russian banking sector, with Sberbank our key pick in EEMEA. We believe there is a strong catch-up & rerating argument considering the performance lag to GEM peers, and we are encouraged by positive developments in 2 key variables: margins & volumes. First, volumes in both retail and corporate have turned a corner and have shown consistently improving momentum (June up 2.1% m/m, July +1.1% FX adjusted, notwithstanding the seasonality and heat-wave). Secondly and even more importantly, is the easing in corporate loans pricing pressure, a lead indicator for future margin evolution. Interest rates on corporate RUB loans rose 10bp in June to 11.5%, while retail deposit rates dropped 40bp to 6.3%, boding well for NIM stability in 2H."
- Foreign banks 2Q results – restarting the engines "With Russian banks results still to be published mid August/ beginning of September, we note the improving trends in foreign banks’ 2Q results: volumes & revenues are up, with provisions volatile q/q but still on an improving y/y trend. Unicredit reported E54m PBT, while SocGen remains loss-making (E42m PBT loss). Due to report on 31 Aug, we see RAIF post E55m PBT in Russia (vs E11m in 2Q 2009)."

Merrill Lynch Russian Banking 20100811

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