Bearish top-down picture
With the oil price hovering around US$45 per barrel, Russian banks are facing a tough
environment in 2009 and 2010. Based on RBS expectations, the economy is likely to fall into
recession in 1H09 and grow a meagre 1% for the full year. Further pressure on the currency
is likely to push RUB/USD to 38 (from 29 now) by year-end 2009, and depletion of the
US$438bn central bank reserves will continue to be driven by foreign debt repayments
(some US$130bn-150bn in 2009). Since we expect ruble depreciation to continue, we do not
expect Russian banking stocks to rally as investors will remain concerned about the stability
of retail deposits and rising bad debts.
Earnings erosion: ROEs under pressure
We expect Russian banks to see a decline in loan volume growth (from some 40% in the last
five years to 10-17% in 2009-10), a potential decline in retail deposits in 1Q09, stable or
slightly declining margins (by up to 20bp) and a significant increase in risk costs (to some
350bp) due to rising NPLs (from 1.5% to 3-6%). As a result, we believe ROEs will collapse
from around 20% to low double digits, or to 4-5% in the extreme case of VTB.
Short-term funding shaky, but the long-term prospects still look good
Despite loan-to-deposits ratios at close to 100% (except for VTB) one of our key concerns for
the sector is a potential retail deposit outflow in 1H09, which would limit the ability to lend. In
the long run, once macroeconomic imbalances are corrected, we expect Russian banks to
become an appealing growth story again. There is low leverage in the Russian economy
(loans/GDP at 40%) and low penetration of banking products (some 34% of the bankable
population is yet to use formal banking).
Valuations look low, but we think they are still not pricing in the worst-case scenario
With 2010F PBs of 0.7x and PEs of 7.6x, the valuation multiples of Russian banks do not
look particularly stretched. However, given the unknown magnitude of credit losses, the scale
of a potential further retail deposit outflow, as well as general country risk (political and
macroeconomic), we believe the worst-case scenario is not priced in. We rate Bank of
Moscow and VTB as Sell. Conversely, Sberbank (Buy) is a relatively interesting bottom-up
story and the clear relative winner in the current turmoil, in our view.

Contents
Executive summary 2
We initiate on the Russian banks with an Underweight stance. Valuations seem
quite low in an historical context, but we think a negative top-down outlook driven by
volatility in retail deposits and asset quality deterioration overshadows their longterm
growth potential.
Short-term concerns vs long-term growth 2
Sberbank offers the best risk-return trade-off, on our analysis 5
Valuations seem low, but are not pricing in the worst-case scenario 6
Investment view 9
Russian banks will face difficult years in 2009-10 due to the worsening
macroeconomic backdrop, volatility of retail deposits and a significant increase in
credit losses of a highly uncertain magnitude. This should limit investors’ appetite
for Russian banking stocks.
Uncertainty rules 9
Funding stability 13
Deleveraging unlikely, but credit growth to decelerate 18
Recapitalisation still distant, but … 25
Earnings erosion looks certain, but some cushions remain 26
Consolidation – the fittest will survive 28
Valuations could fall further 30
Valuations seem attractive at first glance (2010F PB of 0.7x and PE of 7.6x), near
all-time lows. However, we believe they reflect the uncertainty in the Russian
economy, risks of serious credit losses and the potential instability of deposits. They
could fall further.
Valuation in a historical context 30
Company profiles 35
Sberbank 35
VTB 46
Bank of Moscow 57
Bank St Petersberg 67
Vozrozhdenie 76