05.11.2008 - MDM Comment: Market Color, Alfa Bank, RUSB/HCFB/URSAP

Russian equities have erased some of the gains achieved earlier in the morning. Whether the downward pressure is due to the negative dynamics of European indices or a hawkish speech from President Medvedev is difficult for us to say. Meanwhile, the Russia 30 benchmark is almost unchanged (spread over UST inside 500bp). Extremely quiet in ruble bonds. The ruble is relatively stable against the basket (30.38) amid the President’s comments that oil export contracts will be denominated in rubles.

Below are our key stories and comments for today:

1. Alfa Bank (Ba1/BB) has filed an application to VEB to receive a USD400 mn subordinated loan, according to Vedomosti. The Russian business daily also reports that Alfa’s shareholders are ready to match the loan, which would be required to meet VEB’s criteria. We believe that the news should be taken positively by Alfa’s bondholders. We believe that this bank will, along with the state-controlled giants, become a centre for Russian banking sector consolidation and benefit from the crisis in ‘JP Morgan style’. In its recent statements, Alfa said that it is looking at various vulnerable banks as potential M&A targets and is seeking regulatory support for M&A deals. Alfa’s ’09 Eurobond is trading at 30% and above yield wise, while the bond of its fully-owned Ukrainian subsidiary is offering over 40%.

2. We have examined the 3Q08 Russian accounts of the three Russian privately-owned banks most active in the capital markets, Russian Standard Bank (Ba2/BB-), HCFB (Ba3/B+) and URSA Bank (Ba3/NR/B+). All the banks have shown a material rise in the asset base (11-23%) vs. an inconsequential increase in loan books. We believe that the banks have received short-term funding from the Ministry of Finance and the Central Bank, but decided to keep most of it as a liquidity cushion – which makes sense to us. Further, both Russian Standard and HCFB reflected a decline in NPLs (by 2.3-2.4 percentage points), while URSA showed an insignificant increase (by 0.2 percentage points). We believe that all Russian banks now have the luxury of not having to chase borrowers, and are thus able to be far more selective. Tighter risk management may even result in a temporary improvement in loan quality, particularly in the consumer finance segment (as opposed to corporate loans, to which URSA has significant exposure). Going forward, a deterioration of loan book quality across all sectors appears inevitable. 

05.11.2008 14:48