Global Investing

BRIC banks reap ratings reward from government support

The ability of Brazil, Russia, India and China to support their leading banks is tightly correlated to the credit rating on the banks, according to ratings agency Moody’s. The agency compares the ratings of four of the biggest BRIC banks which it says are likely to enjoy sovereign support if they run into trouble.

China’s Industrial & Commercial Bank of China (ICBC) tops the list of BRIC lenders with a rating of (A1 stable)  thanks to the central bank’s $3 trillion plus reserve stash.

Brazil’s Banco do Brazil  (Baa2 positive) is in investment grade territory but it still fares better than the State Bank of India (SBI) (Baa3 stable) and Russia’s Sberbank (Baa3 stable) at one notch above junk status.

That gels broadly with credit ratings for the underlying sovereigns — Brazil for instance is rated Baa2 while India has a Baa3 rating (it is in danger of losing its investment grade rating however). Russia’s sovereign rating though at Baa1 is two notches higher than Sberbank’s Baa3.

The Moody’s report found that all of the four banks had seen creditworthiness improve in recent years. But those in Brazil and China benefited from the stable domestic environments while SBI and Sberbank ratings were constrained by the more challenging operating conditions in India and Russia.

‘Ivanovs’ keen on new cars despite high inflation – Sberbank

Sberbank’s hypothetical Russian middle-class family metric – the ‘Ivanovs’- shows the average Russian family is concerned about high inflation, though that is still barely denting some peoples’ aspirations of getting behind the steering wheel of a new car.

April’s Ivanov index, a survey of more than 2,300 adults across 164 cities in Russia with a population of more than 100,000, notes people are still concerned about persistently high inflation, which in Russia is at around 7 percent.

Household budgets are most concerned by this factor (70 percent), up 1 percent from two months ago, as the average family spends around 40 percent on food. To put that in context, consumers in western Europe spend on average between 15 and 20 percent of income on food, according to the research. But more than 40 percent of respondents still plan to spend on one big-ticket item – to replace their car within the next two years. That is slightly down from 42 percent in the previous survey in February. Car markers have invested heavily in Russia, with sales growing more than 10 percent in 2012 according to AEB, the Association of European Business, as a relatively low level of car ownership and large numbers of older vehicles need replacing.

Russia’s consumers — a promise for the stock market

As we wrote here last week, Russian bond markets are bracing for a flood of foreign capital. But there appears to be a surprising lack of interest in Russian equities.

Russia’s stock market trades on average at 5 times forward earnings, less than half the valuation for broader emerging markets. That’s cheaper than unstable countries such as Pakistan or those in dire economic straits such as Greece. But here’s the rub. Look within the market and here are some of the most expensive companies in emerging markets — mostly consumer-facing names. Retailers such as Dixy and Magnit and internet provider Yandex trade at up to 25 times forward earnings. These compare to some of the turbo-charged valuations in typically expensive markets such as India.

A recent note from Russia’s Sberbank has some interesting numbers on Russia’s consumer potential. Sberbank tracks a hypothetical Russian middle class family, the Ivanovs, to see how consumer confidence is shaping up (According to SB their data are broader in scope than the government’s official consumer confidence survey).

Russian equity sales: disappointing

Investment banks have been dismayed this year by the slump in first-time share listings across emerging markets, the area they had hoped would yield the most growth (and fees). But as we pointed out in this story, emerging IPO volumes fell 40 percent this year. And equity bankers have seen lucrative IPO fees dry up – they almost halved this year from 2011  and are a third of 2007 levels.

One market that has possibly disappointed investors most is Russia.  Its plan a few years ago to privatise large swathes of state-run companies via share sales had bankers salivating — estimates for the proceeds ranged from $30-$50 billion. The pipeline is still alluring, with all manner of companies up for privatisation, including shipping company Sovcomflot and the Russian Railways monopoly.  The Kremlin did raise $5 billion this year by selling a 7.6 percent stake in Sberbank, the banking giant, but not much else has come to pass.  In fact, 2012 saw the state tighten its grip on the energy sector, as government-controlled Rosneft bought oil producer TNK off BP, forking out $12.3 billion and some equity.

Sberbank analyst Chris Weafer estimates Russian companies raised $2.5 billion this year via IPOs, including a $1.8 billion offering from mobile operator Megafon- that’s almost half last year’s levels. Actually, the picture is not that dismal. Weafer points out that total equity issuance to the market, including strategic stake sales by shareholders, came to  $12.8 billion (the total was bumped up by the $5 billion Sberbank deal) and that is up from last year’s total of $9.9 billion.

Discovering the pleasure of dividends in Russia

American financier J.D. Rockefeller said watching dividends rolling in was the only thing that gave him pleasure. But it is a pleasure which until now has largely bypassed shareholders in most big Russian companies. That might be about to change.

Russian firms,  especially the big commodity producers, are generally seen as poor dividend payers. So dividend yields, the ratio of dividends to the share price,  have been unattractive.

On a trailing 5-year period, the average dividend yield in Russia was 1.8 percent compared to 2.5 percent for emerging markets, notes Soren Beck-Petersen, investment director for emerging markets at HSBC Global Asset Management. That absence of positive cash flow from companies is one reason why Russia has always traded so cheap relative to other emerging markets, he says.