Analysis of Sberbank’s proposal to issue new shares by William F. Browder Managing Director, Hermitage Capital Management. January 2001. Background.
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by William F. BrowderManaging Director, Hermitage Capital Management
The 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
Sberbank shares are trading at a huge (74%) discount to the Bank’s Book Value
It is rare for bank to trade at such low values relative to its capital
It is Unheard of for Banks to issue stock below book value, unless a bank is going though some sort of bankruptcy procedure
Sberbank’s Capital ratios were tight early in the year, but are improving with better profitability
Surplus is about $100 mln
If Capital Adequacy Ratio is the key issue, there are a number of options for improving it
Share Issue at a current market price does not change dramatically the capital adequacy ratio (H1)
Issuance Shares dilutes equity with only marginal effect on Capital Adequacy
10.7% -> 11.7%
Realizing Market Value of fixed assets can add $494 to the capital
Revalue unrealized assets can result in much stronger impact on Capital Adequacy
10.7% -> 12.5%
Improving Capital Adequacy from 10.7%
If Sberbank does not pay dividends in 2001, the capitalization will increase by approx. $30 mln
Sberbank could increase Capital Adequacy by:
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.
How long does it take to breach capital adequacy ratio again?
Will shareholders face the same problem in 6-8 month?
Analysis of Loan Book
The situation can be resolved by retaining future
$280 mln in profit (7.9 bln Rbl)
Capital 40.5 retaining 7.9 Bln 48.4
H1 = -------------------- = ------------ = 10.7 ============> ------- = 12.8
Risk Adjusted Assets 378 378
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?
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