After four years of returns on equity of more than 20%, a combination of squeezed margins, hefty provisioning and ongoing investment in ecosystem development had taken a toll on Sber’s bottom line this time last year.
Then, the shadow cast by the pandemic was expected to be a long one. At the Russian group’s investor day last December, managers predicted a steady erosion of net interest margin through to 2023 and reduced the target for annual RoE for the period to just 17%.
Those forecasts proved unduly pessimistic. In October, Sber unveiled a record net profit of R978 billion ($13 billion) for the first nine months of 2021, 75% up on last year and equating to a RoE of 25.8%.
Much of this improvement has been due to external factors. Russia’s economy has recovered faster from the initial pandemic hit than expected, boosted by the global surge in commodity prices and rapid cuts in domestic base rates through 2020.
This reduced the burden on borrowers, allowing Sber to release a chunk of its provisioning. It also spurred demand for lending, particularly from retail clients, playing to the group’s dominance in the market. Sber boasts more than 100 million customers, or more than 80% of Russian adults.
By the end of September, the bank’s retail loan portfolio had expanded by 18.5% from the start of the year, well above the 10% to 12% target set at the end of 2020. Mortgages were the star performer, increasing by 19.9%, but growth was also strong across credit card, consumer and auto lending.
We have seen an increase in our net interest margin in recent months
This worked again to Sber’s advantage when the Russian central bank, alarmed by surging inflation, began a rapid tightening cycle in March that boosted the base rate from 4.25% to 7.5% by mid October.
Alexandra Buriko, Sber’s chief financial officer, notes that the large share of floating rate loans in the bank’s portfolio – particularly rouble-denominated corporate loans and housing loans issued under state mortgage subsidy programmes – makes it “positively sensitive” to key rate rises.
“As a result, we have seen an increase in our net interest margin in recent months, and we expect that, while inevitably we will have to reprice our customer funds as well, it will be partially covered by the increase of the loan interest rates,” she says.
Buriko is also confident that Sber’s asset quality will remain strong going into next year – non-performing loans accounted for just 3.3% of the total at the end of September – although cost of risk will likely normalize from the historic low of 60 basis points seen in the first nine months of 2021.
Progress
Away from its core banking activities, Sber has made good progress on building up its wealth management, brokerage and insurance divisions.
The group’s prized non-financial ecosystem business also showed strong growth, particularly in the e-grocery sector, where Sber now has a 30% market share, but relationships with partners remained strained.
Persistent rumours through the spring suggested a food delivery and taxi joint venture with VK Group – formerly Mail.ru – was about to break up. In October, both sides announced a capital injection of R12.2 billion, but the following month Sber sold its 36% stake in VK.
Also in November, the group finally exited Sberbank Europe, nine years after its ill-fated acquisition of the six-country central and eastern European network from Austria’s Volksbank.
