OREANDA-NEWS. September 15, 2010. Aggregate overdue loans in the Russian banking system (excluding Sberbank) declined from 5.96% in July to 5.90% in August, CBR said on Friday. Gross loans increased by 0.7% MoM, while net profit rose 18.5% MoM, reaching RUB208.5bn for 8M10 (up 1.7% YoY), reported the press-centre of OTKRITIE Financial Corporation.

View: The banking sector continues to grow on the lending side, albeit feebly, which is encouraging, especially given the slower economic activity in the extreme heat of this past summer. The decline in overdue loans in August could be a sign that they have peaked, but Sberbank data for August needs to be incorporated for a full verdict on the sector (for 7M10 Sberbank reported 5.8% of overdue loans under RAS). In our view the visible monthly growth in net profits is a result of a recovery of reserves, in addition to lending growth. Overall, we are growing ever more confident that Russia’s banking sector has embarked upon the path towards recovery.

Valuation and Action: Sberbank remains our top pick in the sector, trading on a 2011E P/BV of 1.5x. Our target price is USD4.1/share. We think that the positive sector trends must even be augmented at Sberbank, given its dominant franchise and strong core operations. Having said that, management has been very conservative thus far with provisioning, a policy that could continue for a while. The largest catalysts for Sberbank  shares should be the stock option program for management, and the long-awaited sponsored DR launch.