OREANDA-NEWS. December 02, 2011. We updated the target price for Bank Vozrozhdenie (VZRZ), taking into consideration 9M11 IFRS results and management outlook from the conference call.

Key changes include – 1) higher cost of risk in 4Q11 and 2012; 2) stronger NIM outlook in 2011 and marginally tighter NIM in 2012 due to rising cost of funds; 3) stronger F&C income; 4) lower terminal ROE (16% vs 18% in previous model)

The bank’s liquidity position and FX exposure are well-balanced, provisioning policy is prudent and conservative. However, expected worsening in market liquidity situation, risks of assets’ quality deterioration and weaker credit demand may pressure bank’s ROE in 2012. We expect the situation to improve in 2013.

Lowering the target price of Bank Vozrozhdenie from USD 32 to USD28 we notice that 29% upside to current market price imply a recommendation “Buy”. However, we reiterate the “Hold” recommendation, as we think that investments in the bank’s shares may become more relevant after uncertainty about economy and banking sector forecasts diminishes.

The bank now trades at 0.9 BV 2011E, however one-digit ROE limits the attractiveness of shares. We suppose that in mid-term ROE may return to 15-20% - in favorable economy conditions, which will lead to higher valuation. However as we consider a moderately unfavorable scenario, bank Vozrozhdenie’s ROE in next 2 years is expected to remain lower than the sector average.

Among the possible market price catalysts we can mention upside risks for macro environment, success in cost optimization process, possible bank SPO in 2H12 and M&A news.