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. Last Updated: 07/27/2016

Sberbank Posts '98 Profit of $660M

Sberbank swam when other banks sank last year, posting 1998 pre-tax profits of 15.4 billion rubles ($660 million), and increasing its share of the retail and corporate markets, a proud Sberbank President Andrei Kazmin said Tuesday.

According to the bank's official 1998 results, compiled according to Russian accounting standards, it also increased its share of individual deposits to 84.7 percent and captured 20 percent of the corporate market.

However, analysts said the bank's success was more due to its privileged position as a state bank than to business acumen.

"The figures for 1998 are simply meaningless," said Margot Jacobs, banking analyst with United Financial Group.

One of the bank's biggest flaws is its undercapitalization, she added. Sberbank's capital amounted to 25 billion rubles under Russian Accounting Standards last year, but its balance sheet lists fixed assets equal to that amount.

"This means that there's no liquid capital left in Sberbank," Jacobs said.

As of Nov. 1, Sberbank's profits were listed as 600 million rubles, a figure that had jumped to 4.4 billion rubles by Dec. 1, Reuters reported.

Analysts said that the 11.2 billion rubles of profit that suddenly appeared during the last 31 days of 1998 was most likely due to the bank's decision to take advantage of a government offer last July to swap ruble-denominated treasury bills, or GKOs, for dollar-denominated debt.

"Sberbank has roughly $3.5 billion of dollar-denominated bonds on its balance sheet," said Andrei Ivanov, banking analyst with Troika Dialog, adding that those assets were acquired in exchange for some of the bank's huge GKO portfolio.

When the government offered in July to swap GKOs maturing before July for seven- and 20-year Eurobonds, Sberbank was one of the few institutions to take the offer, which led to the issuance of roughly $5 billion of dollar-denominated paper.

"My guess is that Sberbank acquired 60 to 70 percent of the issue," Ivanov said.

Few others took the government up on the deal, which offered meager returns of some 14.5 percent at a time when GKOs were yielding 200 percent. At the time, analysts speculated that Sberbank had been forced to take on the bulk of the new paper to salvage the government's plan.

In retrospect, the move to lose some of its treasury-bill exposure just weeks before the GKO default of Aug. 17 was an extremely savvy one on Sberbank's part.

"The decision to swap GKOs for dollar-denominated paper was a smart move on behalf of Sberbank," Ivanov said.

Those dollar assets allowed Sberbank to play its sharply declining ruble liabilities off against significant hard-currency assets, an almost unique possibility for a Russian bank last year.

"My guess is that their profits are mostly a result of foreign exchange gain," Jacobs said.

Sberbank can now simply sit on its dollar bonds and ruble deposits and revalue its dollar assets from time to time, posting profits.

Sberbank's total assets amount to roughly $16 billion, if translated in dollars. Dollar-denominated bonds therefore amount to no less than 22 percent of total assets.

Given the government plans to service its Eurobond debt, Sberbank will also have a good cash flow after the government pays coupons this year.

Kazmin boasted that 440,000 private clients opened accounts at Sberbank since August. Sberbank received hundreds of thousands of new depositors under a government rescue offer to depositors in troubled commercial banks. Those depositors - from banks like Inkombank, SBS-Agro, MOST-Bank and Rossiisky Kredit - were allowed to move their frozen accounts to Sberbank at a disadvantageous exchange rate.

Sberbank's improved performance in attracting corporate customers was thanks to companies searching for rock solid security. The state savings bank, with 84.7 percent of the population's savings, is not likely to be allowed to fail.

The bank increased its share on the corporate market twofold last year, to 20 percent of the total number of accounts. Rostelecom and Baltika brewery were two high profile customers that transferred their accounts to Sberbank last year.

With this new money on its books, Sberbank moved to expand its loan portfolio, increasing it 50 percent to 55 billion rubles.