HERMITAGE CAPITAL MANAGEMENT Analysis of Sberbank’s proposal to issue new shares by William F....
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Transcript of HERMITAGE CAPITAL MANAGEMENT Analysis of Sberbank’s proposal to issue new shares by William F....
HERMITAGE CAPITAL MANAGEMENT
Analysis of Sberbank’s proposal to issue new shares
by William F. BrowderManaging Director,
Hermitage Capital Management
January 2001
HERMITAGE CAPITAL MANAGEMENTBackground
On December 28, 2000 Andrei Kazmin CEO of Sberbank sought approval of the Board of Sberbank to increase capital by 36% in order to raise $130 mln;
The move came abruptly and unexpectedly; The following presentation analyzes this proposal to
determine the merit of the proposal.
HERMITAGE CAPITAL MANAGEMENTWho owns Sberbank?
Central Bank58%
Investment Companies21%
Other legal entities9%
380,000 individual shareholders
12%
HERMITAGE CAPITAL MANAGEMENTProposed Capital Increase
-
5
10
15
20
Num
ber
of S
hare
s
Central Bank57.7%
18.8%
Others 9%
Investment companies 21.4%
Central Bank50%+1 share
Investment companies 15.8%
380,000individuals 11.9%
380,000individuals 8.8%
Others 6.7%
36% capital raise
14,002,000
19,000,000
4,998,000 New shares will be sold for appox.$135,000,000
[1,426,448 will be purchased by Central Bank to sustain 50%+1]
[3,571,552 will be sold elsewhere]
HERMITAGE CAPITAL MANAGEMENT
Why does Sberbank Management want to issue equity?
We don’t know for sure; But they have given two explanations:
– Because there are shares already authorized by shareholders approval in 1997;
– To improve Capital Adequacy.
HERMITAGE CAPITAL MANAGEMENTDo their arguments make sense?
NO: The share price way too low to issue shares without
harming investors; The proposed new issue does not substantially improve
capital adequacy; ..as a result shareholders could face the same choice
shortly (6-8 months); If improving Capital Adequacy is the goal, there are
more effective means of doing this.
HERMITAGE CAPITAL MANAGEMENT
0
50
100
150
200
250
300
350
400
Jan-
97
Mar
-97
May
-97
Jul-
97
Sep-
97
Nov
-97
Jan-
98
Mar
-98
May
-98
Jul-
98
Sep-
98
Nov
-98
Jan-
99
Mar
-99
May
-99
Jul-
99
Sep-
99
Nov
-99
Jan-
00
Mar
-00
May
-00
Jul-
00
Sep-
00
Nov
-00
Sha
re p
rice
, US
D
Shareholders authorize 5,998,000
new shares
Sberbank placed 1,000,000 new shares
to Central Bank
Sberbank decided to
sell 4,998,000
shares
Sberbank faced problems with
capital adequacy ratio
Sberbank share priceThe share price is way too low to issue shares and much lower than when the discussion was made to sell shares
The first principal of Corporate Finance is to sell new shares when the price is high
HERMITAGE CAPITAL MANAGEMENTSberbank: Share Price
Sberbank shares are trading at a huge (74%) discount to the Bank’s Book Value
$110/share
$28.75/share
0
20
40
60
80
100
120
Book Value per share as of 1 Dec 2000
Market Value per share
USD
per
sha
re
- 74% discount to Book Value
For each new dollar raised, that will anly realize $0.26 of new market value
HERMITAGE CAPITAL MANAGEMENTSberbank: Share Price
P/B
It is rare for bank to trade at such low values relative to its capital
HERMITAGE CAPITAL MANAGEMENTSberbank: Share Price
It is Unheard of for Banks to issue stock below book value, unless a bank is going though some sort of bankruptcy procedure
Bank Date of NewIssue
Price/Bookratio
HERMITAGE CAPITAL MANAGEMENTCapital Adequacy
Sberbank’s Capital ratios were tight early in the year, but are improving with better profitability
10.4%
10.7%
10.2%
10.0%
10%
10%
10%
10%
10%
11%
11%
Apr-00 May-00 Jun-00 Jul-00 Aug-00 Sep-00 Oct-00 Nov-00 Dec-00
Capital adequacy ratio (H1)
Central Bank requirement
HERMITAGE CAPITAL MANAGEMENT
Surplus is about $100 mln
$95 mln
$1.45 Bln$1.36 Bln
0
0.2
0.4
0.6
0.8
1
1.2
1.4
1.6
CB capital requirements Own capital as of 1 Dec 2000
Surplus
Bil
lion
US
D
Capital Adequacy
HERMITAGE CAPITAL MANAGEMENT
If Capital Adequacy Ratio is the key issue, there are a number of options for improving it
Capital Adequacy
L o w e rin gA sse ts
S e ll ris k ylo a ns to o the r
b a nk s
S e c u ree xis ting
lo a ns
In c re a sin gC a p ita l
Is s u e ne ws ha re s
R evalueunrealized as s ets :
real es tate;b o nd s ;
Im p ro v eP ro fit
N o td is trib u ted iv id e nd s
Im p ro v in g C a p ita lA d e q u a c y R a tio
21 3 4 5 6
HERMITAGE CAPITAL MANAGEMENT
Capital Adequacy: 1. Share Issuance
Share Issue at a current market price does not change dramatically the capital adequacy ratio (H1)
0
5
10
15
20
1-Dec-00 After new issue
Bil
lion
USD
Total Assets = $19.6 bln
Capital $1.45 bln Capital $1.59 bln
10.7% -> 11.7%Issuance Shares dilutes equity with only marginal effect on Capital Adequacy
HERMITAGE CAPITAL MANAGEMENT
Capital Adequacy: 2. Revalue unrealized assets
Realizing Market Value of fixed assets can add $494 to the capital
1,386
892
494
0
200
400
600
800
1,000
1,200
1,400
1,600
RAS book value IAS book value Rebalance
Mil
lion
US
D
HERMITAGE CAPITAL MANAGEMENT
Capital Adequacy: 2. Revalue unrealized assets
$1.74 Bln
$1.45 Bln
1.30
1.35
1.40
1.45
1.50
1.55
1.60
1.65
1.70
1.75
1.80
Old Capital New Capital
Bil
lion
US
D
10.7% -> 12.5%
Revalue unrealized assets can result in much stronger impact on Capital Adequacy
HERMITAGE CAPITAL MANAGEMENT
Capital Adequacy: 3. Improving Profitability
0
200
400
600
800
1,000
1,200
1,400
1,600
Non-interest cost structure (2000E)
Mil
lion
US
D
Wages34%
$1,890
Overheadcosts55%
Others 10%
Possible Actions Reduce headquarter by 10% => $66 m;
HERMITAGE CAPITAL MANAGEMENT
Capital Adequacy: 3. Improving Profitability 2000 Net Profit _____________ Cost Savings Low estim Cost
Change in Capital at year 2001
Improving Capital Adequacy from 10.7%
X%
Y%
HERMITAGE CAPITAL MANAGEMENT
Capital Adequacy: 4. Not distributing dividends
Dividend Policy
Million Rubles Million USD1997 132.0 21.0 1998 315.0 12.5 1999 462.1 16.6
2000E 798.1 27.5
If Sberbank does not pay dividends in 2001, the capitalization will increase by approx. $30 mln
HERMITAGE CAPITAL MANAGEMENT
Capital Adequacy: 5. Sell Risky Loans
mln USDTotal Assets 19.54 Loans 8.43 Gov't Bonds 6.08 Cash 3.64 Real Estate 0.76 Others 0.63
Central Bank provisions Loans 100% Gov't Bonds 20% Cash 0% Real Estate 100% Others 100%
HERMITAGE CAPITAL MANAGEMENT
Capital Adequacy: 5. Sell Risky Loans
Sberbank could increase Capital Adequacy by: Realizing 15% of Risky Loans can result in 11%
increase of Capital Adequacy
HERMITAGE CAPITAL MANAGEMENTCapital Adequacy - Summary
L o w e ringA sse ts
S e ll ris k ylo a ns to o the r
b a nk s
S e c u ree xis ting
lo a ns
In c re a singC a p ita l
Is s u e ne ws ha re s
R evalueunrealized as s ets :
real es tate;b o nd s ;
Im p ro v eP ro fit
N o td is trib u ted iv id e nd s
Im p ro v in g C a p ita lA d e q u a c y R a tio
up f ro m1 0 .7 % to1 1 .7 %
up f ro m1 0 .7 % to1 3 .9 %
up f ro m1 0 .7 % to
1 1 .3
up f ro m1 0 .7 % to
1 0 .9
up f ro m1 0 .7 % to
???
up f ro m1 0 .7 % to
1 1 .8
21 3 4 5 6
HERMITAGE CAPITAL MANAGEMENTCapital Adequacy - Summary
Issuing New Shares is a very expensive way to provide only a small increase in Capital;
Revaluing Assets and cutting Costs are much better ways to improve capital adequacy without diluting shareholders.
HERMITAGE CAPITAL MANAGEMENTSummary - Wider Implications
1) There is an oligarch “waiting in the wings” to buy the major part of new issue and control a crucial and undervalued economic asset;
2) The Management is too “soviet” and does not understand the most basic principals of Corporate finance.
HERMITAGE CAPITAL MANAGEMENTWho made this decision?
Unanimous decision
V ic to r G erash en k oC ha irm a n, C ha irm a n of C e ntra l
B a nk of R us s ia
V la d im irG o ry u no v
D ep u ty C h air m an o fC en tr a l Ban k o f R u s s ia
A lexe iK u d r in
M inis te r of F ina nc e
A llaA le s hk inaD e puty C E O of
S be rba nk
A n d re iK a zm in
C E O of S be rba nk
BellaZla tk is
D e puty M inis te r ofF ina nc e
B o risF edo ro v
M in o r ityS h ar eh o ld er s
R ep r es en ta tiv e
Ily aSherbo vich
M in o r ityS h ar eh o ld er s
R ep r es en ta tiv e
. . .
HERMITAGE CAPITAL MANAGEMENTSberbank: Share Issuance
How long does it take to breach capital adequacy ratio again?
Will shareholders face the same problem in 6-8 month?
HERMITAGE CAPITAL MANAGEMENTSberbank: Loans Portfolio
Analysis of Loan Book
NN Amount Customer Provision12345678910
HERMITAGE CAPITAL MANAGEMENTSberbank: Retaining Profit
The situation can be resolved by retaining future $280 mln in profit (7.9 bln Rbl)
Current Future
Capital 40.5 retaining 7.9 Bln 48.4
H1 = -------------------- = ------------ = 10.7 ============> ------- = 12.8
Risk Adjusted Assets 378 378
HERMITAGE CAPITAL MANAGEMENT
Sberbank: Central Bank regulations
Central bank increased the low limit for capital adequacy ratio from 8% to 10%; Algorithm of calculations of Risk Adjusted Assets (RAA) was significantly
changed which resulted in 71% growth of Sberbank RAA.
Sberbank faced problems with capital adequacy ratio (H1) as a result of:
During the same year 2000 Sberbank breached the required limit of Maximum exposure ratio (25%) by three times and received special permission from Central Bank.
Whether it will be cheaper way for Central Bank to issue the same type permission for capital adequacy ratio rather than put additional financing to sustain its position in Sberbank?
HERMITAGE CAPITAL MANAGEMENT
Disclaimer
This material is for information purposes only and is not an invitation to subscribe for units or shares in the Hermitage Fund. Subscriptions will only be received and units or shares issued on the basis of the current prospectus for the Fund, and prospective investors should carefully consider the risk warnings and disclosures for the Fund set out therein. Investors should also consider any other factors that may be relevant to their circumstances, including tax considerations, before making an investment.
The information is based on data obtained from publicly available sources, which have not been verified by Hermitage Capital Management Limited, or any of its respective associates or affiliates. As a result of the difficulty in obtaining reliable data in Russia, we do not represent this information to be accurate and complete and we do not accept any responsibility for the reasonableness of any conclusions based upon such information.
Past performance is not necessarily indicative of the likely future performance of an investment. The price of units or shares can go down as well as up and may be affected by changes in rates of exchange.
The Hermitage Fund has been authorised by the Guernsey Financial Services Commission as a Class B Collective Investment Scheme under the Protection of Investors (Bailiwick of Guernsey) Law 1987 and the Collective Investment Schemes (Class B) Rules 1990. It must be understood that in giving this authorisation the Commission does not vouch for the financial soundness or correctness of any of the statements made or opinions expressed with regard to The Hermitage Fund. Investors in The Hermitage Fund are not eligible for the payment of any compensation under the Collective Investment Schemes (Compensation of Investors) Rules 1998 made under the Law.