Analyses and investment views

The best bank in Europe?

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We recently were debating about which bank is the best in Europe. We agreed to evaluate them according to three criteria:

1. Basic financial indicators, such as return on equity, return on assets, cost–income ratio, interest margin, and ratio of total assets to equity.

2. Resistance to economic crisis.

3. Market position.

These criteria produced an unambiguous result: the best bank in Europe is Russia’s Sberbank. This naturally may surprise many people, but the numbers are convincing.

Let’s start with the financial indicators. When I analyse a bank, the first thing that interests me is return on equity (ROE). What ROE is common in Europe nowadays? In the main countries (Germany, France, the UK, Italy, Spain, Switzerland), this is mostly in single-digit numbers. The average lies somewhere between 4% and 9% (which is less, by the way, than the banks’ cost of equity). Sweden stands much better with an average around 13%. This is a level approached by the Czech banks KB and Moneta. Erste, as the Eastern-European leader, has an ROE of about 12% this year. Turkey’s banks also have returns on equity in the low double digits. Sberbank’s ROE will be 24% this year. That is a level other banks (including other Russian banks) can only dream about.

ROE by itself is not enough. As a second step, it needs to be compared to return on assets (ROA) and the ratio of total assets to equity. This is because an ROE achieved with low leverage has a different value than does an ROE achieved with high leverage. Sberbank’s ROA is 3% and the ratio of total assets to equity is 8. This means the bank only needs leverage of 8 to achieve an ROE of 24. Deutsche Bank, for example, has leverage of 26 (ROE 3.5%), and high leverage is typical also for most other European banks.

When we add into the mix Sberbank’s net interest margin of 6% and cost–income ratio of 35%, we get a set of fundamental numbers most bankers from other European banks can only look up to in awe. I know of no other large bank in Europe with comparably high-quality basic indicators.

How about the European banks’ resistance to a possible economic crisis? From time to time, ECB conducts so-called bank stress tests to determine this. These tests, however, only prescribe modestly stressful conditions, and this is a rather academic exercise with opaque results. In contrast, Sberbank went through a real crisis a few years back when Russia invaded Ukraine. This was followed by a deep recession in Russia, with GDP dropping by 5%, inflation rising, interest rates reaching as high as 17%, the rouble losing half its value, the oil price dropping by more than half, and, on top of everything else, there were the sanctions.

If this confluence of events were to come to pass in a Western European country, there would be no stone still standing on another in its banking sector. Most banks would have large and in many cases existential problems and deep losses. Sberbank not only remained profitable, and quite solidly so, but it did not record a single losing quarter. In its worst year in the midst of the recession in 2015 it had an ROE of 11%.

Now, let’s take a look at market position, upon which basis I believe that Sberbank is also second to none in Europe. Its share in deposits for the immense Russian market is close to 50%. This same situation reigns in regard to, for example, mortgages, number of clients, employee and pension accounts. All of this brings it enormous competitive and cost advantages, which it very probably cannot lose in the foreseeable future. Sberbank’s dominance on the Russian banking market has only strengthened during the recent crisis. Within the Russian market, it is perceived as the most stable. During the recent recession, a part of the deposits from other banks was moved to Sberbank even despite that Sberbank pays the lowest interest on deposits.

The idea that Europe’s strongest bank and the one with the most robust results is in a country such as Russia may be surprising and difficult for many investors to swallow. I am also quite sure that many of them will disagree with me, but the numbers speak for themselves.

Sometimes it pays to toss your prejudices out the window. In Sberbank’s case, the ideal opportunity to do so was in 2014. Russia was facing a perfect storm, as detailed above, of deep recession, high inflation, collapsing prices for the rouble and oil, and skyrocketing interest rates. This was partially its own fault, due to its attack on Ukraine. The prices of Russian stocks, including Sberbank’s, dropped sharply. The Russian market has long been cheap, and in 2014 it was irresistibly cheap.

The West’s sanctions have contributed to this. No western portfolio manager wanted his or her portfolio to include the politically incorrect Russian stocks, and therefore they were selling them with practically no regard for price. The price of Sberbank shares at the end of 2014 dropped to 55 roubles (the ADRs cost around USD 4). Back then, the best bank in Europe could be bought for half its book value.

Invest with care!

Daniel Gladiš, 3 December 2017

P.S. This document expresses the opinions of the author(s) at the time of its writing and is intended exclusively for educational purposes. It is not an investment recommendation. Our estimates and projections of the future may and probably will contain errors. Do not rely on them but use your own common sense and your own analyses when making investment decisions. Vltava Fund holds Sberbank shares in its portfolio.


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