OREANDA-NEWS. July 29, 2011. Aton organised an investor meeting with Bank Vozrozhdenie, which was represented by its Treasury head Andrey Shalimov and IR chief Sergey Klinkov. The meeting left us with a generally positive impression and in this brief note we summarise the main discussion points.

Rates to rise? Management believes that downward movement in corporate lending rates has ceased and that in autumn the first lending rate rises should be seen from major players. They noted that funding across the sector is not likely to get cheaper, as corporate deposit rates have been climbing since March and retail deposit rates could start creeping up soon.

Corporate loan book growth continues. The bank successfully defended the neutral growth seen in its corporate loan book in 2Q following the rapid growth it recorded in 1Q11 (+10%). Despite significant loan repayments in 2Q the corporate loan book did not contract. Overall, management expects corporate loan book growth of 15% in FY11, but there is upside risk and a clearer picture should be available in September.

Mortgages surging. The bank views mortgages as the key retail product and after a slow start to the year its mortgage portfolio surged 20% in 2Q, on our estimates based on the bank’s RAS resu lts. Management’s outlook for full-year mortgage growth remains at 40%. Another significant retail product, credit cards, is currently offered only to existing clients and the bank does not yet feel ready to offer it to a wider market.

Cost optimisation on the way. A high cost/income ratio (74% in 2010; 73% in 1Q11) remains a concern for both investors and management. The bank sees substantial potential for cost optimisation and is undertaking a two-year programme to normalise expenses. The 2Q results should not reveal any material improvements, but the effect should be increasingly visible in future, management said.

Earnings outlook remains unchanged for now. Company guidance from the 1Q11 results conference call remains intact with a FY11 bottom line of RUB1.1bn seen as a “basic and conservative forecast” with upside of RUB1.5bn purely on tax effects.

Plans to raise capital in 2012. The bank has preliminary plans to raise equity at the end of 2012 but insists it must first demonstrate an improved performance in order to be more attractive to the markets. We agree with this view and note that current RoAE levels (7.4% in 1Q11, with the bank’s basic expectation of FY11 net income of RUB1.1bn translating into a 7% RoAE) might not look especially appealing to investors given current market conditions. We believe that if the bank is successful in raising RoAE above 15% in 2012, its investment case would look much more compelling.