By Anatoly Gorev, RIA Novosti
Russian lending and financial institutions were not in a hurry to float their shares on the open market until it emerged that state-controlled savings bank Sberbank, which holds more than half of the country’s private deposits, intends to sell a large number of shares on the open market in the first quarter of 2007. Part of the issue will be sold to the public.
Sberbank’s IPO (initial public offering) is expected to be the largest ever in Russia. The bank will float 2.5-3.5 million shares, valued at $6.5-$8 billion at current prices.
This fact alone could cause a sensation, because Russian companies that have placed their shares on the open market in the past have preferred foreign trading sites, predominantly the London Stock Exchange (LSE). Russia’s financial and lending institutions did not use to float their shares at all, initially because they were not sure of success, and in the last two years because it was more profitable to sell a stake or the entire business to a strategic investor.
The transactions concluded in the past few months show that such investors (large foreign financial groups) usually pay 3.5-4% above the market price for Russian banking assets even though the latter are in huge demand.
There is one more reason behind the banks’ reluctance to conduct IPOs. Ilya Sherbovich, president of Deutsche UFG, said the Russian banking sector has profit margins of 30-40%, so bank owners are not eager to go public and have to share profits with minority shareholders they would take on as a result of an IPO.
However, the flotation of Sberbank – Russia’s oldest bank, founded 165 years ago – could buck the trend and encourage other banks to follow suit, especially if its IPO is successful, which the majority of experts are sure it will be.
Sberbank controls about 35% of the private-loans market, 60% of the mortgage market, and more than 50% of private deposits. Its president, Andrei Kazmin, has recently said that the bank’s 2006 net profits are expected to total 75 billion rubles ($2.8 billion), up 16% on the 2005 figure (64.5 billion). The bank’s owner’s equity should grow more than 30% this year to 330 billion rubles ($12.4 billion).
Sberbank’s shares have lately been the growth leader on the Russian market (their value doubled in 2005). Sherbovich said the price of the bank’s common stock had grown 60% as of September this year, while share values in the banking sector as a whole are expected to increase some 40% this year.
Therefore, Sberbank’s shares will enjoy huge demand among institutional and private investors, especially because the majority of investment bankers say its equities are undervalued despite the rapid growth of their prices in the last few years.
This means that Sberbank will most likely raise a record sum. Experts say its flotation will be more successful than Rosneft’s IPO in July of this year, when individual investors (as opposed to institutions) bought only $600 million worth of shares in the state-controlled oil company instead of the expected $1 billion.
Sergei Rybakov, an analyst with the Aton Line web brokerage, believes many factors are to blame for this disappointing result, including the fact that Rosneft floated its shares on both the domestic and foreign markets, which hindered the IPO’s promotion in Russia. The expert said Rosneft’s mistakes would be taken into account during preparations for Sberbank’s IPO, allowing it to do much better.
Maxim Gorelov, business director of the Business Systems Development (RBS) auditing and consulting group, said the general perception of state banks and the confidence they inspire will work to Sberbank’s advantage.
Sberbank’s IPO could reduce demand for shares of VTB (Vneshtorgbank), which will be offered next May (VTB, Russia’s second-largest bank, had intended to become the first bank in Russia to float its shares). Experts, however, say the market is big enough for both banks. Interest in banking equities is very high among investors owing to the high profitability of the banking sector and the fact that Sberbank’s securities are the only truly liquid assets so far available in the industry.
Other leading players in the banking market, including state-owned Gazprombank and commercial Rosbank and Alfa Bank, could follow the example of Sberbank and VTB, provided the latter successfully conduct their IPOs. Analysts say this will benefit both the individual banks and the sector as a whole, because banks that go public must adjust their operations to meet certain requirements and standards and disclose their ownership structure.
Alexei Fyodorov, an expert with the listing department of the Russian Trading System (RTS) exchange, said that after the IPO the issuing bank will have to continue to supply information about itself, its owners and affiliated persons to individual and corporate investors. This will raise the standards of disclosure in the Russian banking sector, which will therefore become more understandable and attractive to foreign investors. Taken together, this will increase the inflow of foreigners’ money.
In addition, banks that float their shares on the open market increase their owner’s equity, which is important now that higher demands have been set for this norm and in view of Russia’s impending accession to the World Trade Organization. When it becomes a full WTO member, competition in the banking sector will grow owing to a massive influx of foreign financial and lending organizations.
In fact, the latter are already elbowing their way into the Russian market. President Vladimir Putin said at a recent board meeting of the State Council that foreign banks accounted for 40% of lending services, and called on Russian banks to increase their owner’s equity, in part by conducting initial public offerings. -0-