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15.10.2008 - MDM Comment: More support from CBR; Eurokommerz 1H08

Russian equities and Eurobonds are paring yesterday's gains as the ‘big bailout pill’ seems to have lost some of its curative magic. Activity in local bonds is minimal with buyer interest only seen for top quality short-dated issues. The ruble’s position against the bi-currency basket is almost unchanged. Below we discuss two important stories that broke yesterday:

1. The Central Bank of Russia took a set of new measures to ensure the stability of the banking system and ruble.

- Obligatory reserve requirements have been lowered to a flat rate of 0.5% from the variable rates in the 2.0-4.5% range, which were decided according to type of liability. We estimate that this will inject some RUB70-80 bn of spare liquidity to Russian banks. In our view, two points are salient here: First, cash will be released as soon as this week, and second, the measure will affect all banks pro rata to their balance sheet.

- Lombard loan rates have been cut by 50bp and the 3-month repo has been introduced. With this the Central Bank of Russia (CBR) further improves conditions in which the banks can refinance themselves.

- Overnight and one-week deposit rates have been raised by 50bp to 4.25% and 4.75%, respectively. The regulator is effectively trying to increase the appeal of the ruble carry trade and thus partially reverse the current trend of capital flight.

- The currency swap rate has been increased from 8.0% to 10.0%. This is a warning shot across the bows of those betting on ruble weakness. Some banks have been buying dollars, swapping them for rubles at the CBR and then using them to buying dollars again. The rate increase makes the argument for making this bet less obvious.

2. Eurokommerz (B2) published 1H08 IFRS report. All the company’s numbers look solid, including asset growth (33%), interest margins, profitability (ROAE around 50%) and capitalization (Equity/Assets over 20%). Short-term asset structure also remains to be one of the company’s important credit strengths.

However, we continue to be concerned with Eurokommerz’s high dependence on capital market funding as well as its asset quality. The latter is difficult to assess due to asset growth and the company’s unregulated status (no banking license). Payment discipline in the retail sector, to which Eurokommerz has significant exposure, has been deteriorating recently as a result of the liquidity crisis. Eurokommerz had a material cash position at the end of reporting date (almost RUB7 bn); however, short-term bond repayment needs are even more significant – RUB9 bn in the next 3 months. The company’s bonds are trading at over 100% yield wise. In fact, many Russian financial institutions are now trading at (we think - unfairly) distressed levels.

15.10.2008 14:38
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