OREANDA-NEWS. September 06, 2010. August turned out to be a volatile month for the banking sector: CIS banks outperformed on the back of upbeat Georgian sector stats. VTB Capital Banks CIS Index gained 5.0% beating both the RTS index and the VTB Capital Banks Index. Meanwhile, Russian banks’ stocks have underperformed the market (VTB Capital Banks Russia shed 7.6% the RTSI lost 4.0%) on the back of negative global sentiment and contracting margins. Banks could be under pressure in the short term, but long-term they could benefit from a growing macro story.

Margins squeezed. The CBR reported corporate loans rates falling 100bp in August to 10.5%, while interest rates on retail deposits were down 40bp to 7.55%. Excess liquidity stemming from the lack of loan growth also drove margins down. Margins shrank consequently, so in order to protect them, banks are likely to further cut deposit rates.

2Q10 reporting season: leaders’ change. Banks continue to churn out IFRS results, while mid-caps have likely left the worst behind (VZRZ: lending up 7.4% QoQ, NIM a bit down 52bp QoQ). At the same time, Sberbank saw shrinking margins (-131bp QoQ, -150bp likely by year-end), high provisioning (12.5% in 2Q10) and marginal lending growth (0.3% QoQ). Sberbank’s management retains its cautious stance, while VZRZ’s management expects NIM to rebound in 2H10. VTB reported in line, but notably better quality of earnings vs. market expectations.

CIS banks. BGEO recorded highly robust 2Q10 results (lending up 11% QoQ, NIM up 22bp QoQ, provisions down). KKB saw neutral results but first time declines in NPLs, while Halyk reported margins shrinking 80bp QoQ and F&C falling 32% QoQ, overall negative.

Banks under pressure. Negative sentiment and weak 2Q10 earnings could weigh on our preferred banks’ stocks (Sberbank and Halyk) in the near term. That said, we believe that they are to outperform in the long term when macro and sector recovery is more pronounced.