Analysis of Sberbank

1
Analysis of Sberbanks proposal to issue new
shares by William F. BrowderManaging Director,
Hermitage Capital Management

January 2001
2
Background

• On December 28, 2000 Andrei Kazmin CEO of
  Sberbank sought approval of the Board of Sberbank
  to increase capital by 36 in order to raise 130
  mln
• The move came abruptly and unexpectedly
• The following presentation analyzes this proposal
  to determine the merit of the proposal.

3
Who owns Sberbank?
4
Proposed Capital Increase
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Why does Sberbank Management want to issue equity?

• We dont know for sure
• But they have given two explanations
• Because there are shares already authorized by
  shareholders approval in 1997
• To improve Capital Adequacy.

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Do their arguments make sense?

• NO
• The share price way too low to issue shares
  without harming investors
• The proposed new issue does not substantially
  improve capital adequacy
• ..as a result shareholders could face the same
  choice shortly (6-8 months)
• If improving Capital Adequacy is the goal, there
  are more effective means of doing this.

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Sberbank share price

• The share price is way too low to issue shares
  and much lower than when the discussion was made
  to sell shares

The first principal of Corporate Finance is to
sell new shares when the price is high
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Sberbank Share Price

• Sberbank shares are trading at a huge (74)
  discount to the Banks Book Value

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Sberbank Share Price
It is rare for bank to trade at such low values
relative to its capital

• P/B

10
Sberbank Share Price
It is Unheard of for Banks to issue stock below
book value, unless a bank is going though some
sort of bankruptcy procedure
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Capital Adequacy

• Sberbanks Capital ratios were tight early in the
  year, but are improving with better profitability

12
Capital Adequacy

• Surplus is about 100 mln

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Capital Adequacy

• If Capital Adequacy Ratio is the key issue, there
  are a number of options for improving it

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Capital Adequacy 1. Share Issuance

• Share Issue at a current market price does not
  change dramatically the capital adequacy ratio
  (H1)

Issuance Shares dilutes equity with only marginal
effect on Capital Adequacy
10.7 -gt 11.7
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Capital Adequacy 2. Revalue unrealized assets

• Realizing Market Value of fixed assets can add
  494 to the capital

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Capital Adequacy 2. Revalue unrealized assets
Revalue unrealized assets can result in much
stronger impact on Capital Adequacy
10.7 -gt 12.5
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Capital Adequacy 3. Improving Profitability

• Possible Actions
• Reduce headquarter by 10 gt 66 m

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Capital Adequacy 3. Improving Profitability

• 2000 Net Profit _____________
• Cost Savings Low estim
• Cost
• Change in Capital at year 2001

X
Improving Capital Adequacy from 10.7
Y
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Capital Adequacy 4. Not distributing dividends

• Dividend Policy

If Sberbank does not pay dividends in 2001, the
capitalization will increase by approx. 30 mln
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Capital Adequacy 5. Sell Risky Loans
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Capital Adequacy 5. Sell Risky Loans

• Sberbank could increase Capital Adequacy by
• Realizing 15 of Risky Loans can result in 11
  increase of Capital Adequacy

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Capital Adequacy - Summary
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Capital Adequacy - Summary

• Issuing New Shares is a very expensive way to
  provide only a small increase in Capital
• Revaluing Assets and cutting Costs are much
  better ways to improve capital adequacy without
  diluting shareholders.

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Summary - Wider Implications

• 1) There is an oligarch waiting in the wings to
  buy the major part of new issue and control a
  crucial and undervalued economic asset
• 2) The Management is too soviet and does not
  understand the most basic principals of Corporate
  finance.

25
Who made this decision?

• Unanimous decision

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Sberbank Share Issuance

• How long does it take to breach capital adequacy
  ratio again?
• Will shareholders face the same problem in 6-8
  month?

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Sberbank Loans Portfolio

• Analysis of Loan Book

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Sberbank Retaining Profit

• The situation can be resolved by retaining future
  
• 280 mln in profit (7.9 bln Rbl)

Current
Future
Capital 40.5 retaining
7.9 Bln 48.4 H1 --------------------
------------ 10.7 gt -------
12.8 Risk Adjusted Assets 378
378
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Sberbank Central Bank regulations
Sberbank faced problems with capital adequacy
ratio (H1) as a result of

• Central bank increased the low limit for capital
  adequacy ratio from 8 to 10
• Algorithm of calculations of Risk Adjusted Assets
  (RAA) was significantly changed which resulted in
  71 growth of Sberbank RAA.

During the same year 2000 Sberbank breached the
required limit of Maximum exposure ratio (25) by
three times and received special permission from
Central Bank. Whether it will be cheaper way for
Central Bank to issue the same type permission
for capital adequacy ratio rather than put
additional financing to sustain its position in
Sberbank?
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Disclaimer
This material is for information purposes only
and is not an invitation to subscribe for units
or shares in the Hermitage Fund. Subscriptions
will only be received and units or shares issued
on the basis of the current prospectus for the
Fund, and prospective investors should carefully
consider the risk warnings and disclosures for
the Fund set out therein. Investors should also
consider any other factors that may be relevant
to their circumstances, including tax
considerations, before making an investment. The
information is based on data obtained from
publicly available sources, which have not been
verified by Hermitage Capital Management Limited,
or any of its respective associates or
affiliates. As a result of the difficulty in
obtaining reliable data in Russia, we do not
represent this information to be accurate and
complete and we do not accept any responsibility
for the reasonableness of any conclusions based
upon such information. Past performance is not
necessarily indicative of the likely future
performance of an investment. The price of units
or shares can go down as well as up and may be
affected by changes in rates of exchange. The
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Guernsey Financial Services Commission as a Class
B Collective Investment Scheme under the
Protection of Investors (Bailiwick of Guernsey)
Law 1987 and the Collective Investment Schemes
(Class B) Rules 1990. It must be understood that
in giving this authorisation the Commission does
not vouch for the financial soundness or
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Fund. Investors in The Hermitage Fund are not
eligible for the payment of any compensation
under the Collective Investment Schemes
(Compensation of Investors) Rules 1998 made under
the Law.