Should You Go Short on Sberbank?

Click on picture to enlarge

1 Month Performance of Sberbank of Russia

Sberbank (SBRF) (OTC: SBRCY) has featured prominently in the financial news in September. It dominates the Russian banking scene with approximately 33% control of the banking industry. The Russian banking conglomerate has operations throughout the world and it has come under increasing pressure following Russia’s annexation of Crimea and the punitive sanctions imposed on the country by the international community. With a crumbling ruble, dwindling forex reserves and massive capital flight to contend with Sberbank is feeling the pinch on multiple fronts.

In the second week of September, Sberbank was forced to sell its banking operations in Slovenia after an audit revealed that the market was simply unable to sustain it and offer any growth opportunities. At the time of the sale, 2 buyers were identified: Expobank (a Russian Bank) and US Apollo. The sale bodes poorly for Sberbank’s foray into the Slovenian market, with operations commencing in 2012 when it acquired Volksbank International (an Austrian-owned bank). The Slovenian banking branch of Sberbank had assets valued at €1.94 billion. In total, there are 12 Sberbank branches throughout 8 towns in Slovenia.

The Fitch Downgrade for Sberbank

On the 24 September 2015, Fitch Ratings Inc, one of the 3 largest credit ratings agencies in the U.S., downgraded its outlook on Sberbank subsidiaries. Fitch revised its long-term IDR (Issuer Default Ratings) for Sberbank Europe AG (SBEU) to BB+, its IDR of Sberbank Slovensko (SBSK) to BB+ and its IDR of Sberbank Switzerland (SBS) to BBB-. These major subsidiaries of Sberbank (SBRF) have negatively impacted on the overall financial wellbeing of Sberbank (SBRF). The negative ratings change has resulted in put options being placed on the Russian bank. The Fitch report confirmed the following:

• Sberbank Europe AG (SBEU), Sberbank Slovensko (SBSK) and Sberbank Switzerland (SBS) will all need financial assistance from Sberbank Russia (SBRF)
• All three European banks are struggling to independently maintain themselves
• The aforementioned banks may also need additional financial support from the Russian Federation
• The Russian banking giant is also at greater risk as a result of general weakness in the Russian economy

The Fitch credit downgrade is based on the past performance of Sberbank (SBRF) which has provided financial assistance to its European banking subsidiaries in the past. The more support that is needed, the less financially independent the European operations are and the lower the credit rating. There is also tremendous concern that the performance of Sberbank Russia is highly dependent on the performance of its foreign subsidiaries. Weakening global performance inevitably leads to declining financial performance of the Russian banking giant. The tensions between Russia and the West will not prevent Sberbank from supporting its foreign subsidiaries because they are Russian interests.

What the Fitch Ratings Mean for your Sberbank Options

Any time a credit downgrade is applied this drags down the price of the stock. Fitch is one of three major credit ratings agencies whose opinions of companies are widely regarded. The broader implications of credit downgrades impact on other tradable sectors too like commodities exporters who require access to credit to function effectively. Overall though, the inherent strength of Sberbank (SBRF) underpins the stability of these subsidiary banks, but greater independence and profitability would certainly boost the stock’s performance and enhance its long-term viability as a safe investment. Given the fact that Sberbank is operating in high-risk economies, the credit ratings downgrade is apropos.

The banking giant is also facing other problems related to its credit downgrade:

• Low interest rates decrease potential yields on loans (low margins)
• Lack of scale has hampered operating efficiency in European markets
• Fitch is anticipating minimal profits for SBEU in 2016 (above break-even point)

The safe money in the case of Sberbank and the aforementioned European subsidiaries would indicate that short-term put options are the order of the day. However, it should be remembered that the Russian ruble has enjoyed 3 weeks of consistent gains against the USD. The stabilization of Crude oil prices around the $50 mark (Brent Crude) should assist in boosting the performance of the ruble and the Russian economy which is heavily energy-dependent. The Russian currency is currently trading at 65.7365 to the USD (up 0.34%). Overall, the RUB has recovered 8.1% after closing at its weakest level in August 2015.

Click on picture to enlarge

1 month performance of the RUB/USD pair

Sberbank shares have a 1-year return of -3.35% and but they have a year-to-date return of 35.96%. The company’s market capitalization in Russian rubles is 1.609 trillion and it has an earnings per share (RUB) of 9.56. It will be interesting to see how the credit downgrade by Fitch impacts the share price before the year’s end.