The Central Bank of Russia (CBR) has published its FY18 banking sector statistics. Assets grew 10.4% y/y, supported by a 13.9% expansion of the loan portfolio. Profit increased 70% y/y to RUB 1.3 trillion ($19.7bn), with an implied ROE of 15% vs. 9% in 2017, VTB Capital (VTBC) analyst Svetlana Aslanova said in a note.

The results will be welcomed by the government and sector alike after several years of pain. The banking sector made zero profits during the silent crisis of 2014-2016, whereas what profit was made, was made entirely by state-owned retail giant Sberbank. Since then the banking sector has returned to health, but in 2017 it had a near miss when the CBR closed four of the country’s largest commercial banks and nearly sparked a systemic meltdown. Profits in September 2017 plunged by over RUB300bn, wiping out almost all the gains to date that year.

“Excluding the effect from banks under sanitisation, profit reached RUB1.9 trillion. Sberbank earnings accounted for 60% of sector earnings, down from 83% in 2017,” Aslanova said in a note.

But problems remain. The Russian banking sector remains very lopsided with the handful of the biggest, largely state-owned, banks at the top of the list making most of the hay. The smaller mostly privately owned banks that make up the bulk of the list exist hand to mouth or are simply glorified treasury operations for companies.

The CBR has continued its campaign of closing these smaller banks at the consistent rate of one every three days since CBR governor Elvira Nabiullina took over in 2013. The CBR is in the midst of a banking sector clean up that is coming into its end game as the number of banks in Russia fell below 500 in November last year.

“Overall, the 2018 stats highlight the uneven recovery of Russian banks, although risk costs are the key driver of ROE recovery. For 2019, we expect competition to pick up, especially as Otkritie tries to regain market share after the completion of its clean up,” Aslanova wrote, referring to the failed Financial Corporation Otkritie which was merged with Binbank (aka B&N Bank) in January to become a top five player. The CBR intends to get the bank back on its feet before selling it off.

The analyst’s top picks in the banking sector remain the same. Sberbank remains the investor’s darling and the “tourist stock” held by everyone with even a passing interest in Russia’s equity universe.

The other top pick is Russia’s only purely online bank Tinkoff Bank, which remains an outperformer and one of the few Russian shares that has regained its IPO price valuation since 2008 crisis. The bank is abandoning the traditional concept of a stolid bricks and mortar banking establishment and is trying to create a “lifestyle bank,” the bank told bne IntelliNews in an exclusive interview last year.

“We remain positive on Sberbank and TCS as disciplined players in a tougher environment. For the Sberbank, we have a 12-month Target Price of RUB 330/ord, which suggests an ETR of 64% and justifies a Buy recommendation. Our 12-month Target Price for TCS is $28, implying a 60% ETR, and thus a Buy,” Aslanova said.

There was good news too on the lending front. While consumer loans have recovered well in the last two years, corporate borrowing  has remained depressed as bankers preferred to go to the bond markets and remain pessimistic about Russia’s near term outlook. The presidential elections last March also depressed borrowing activity.

Corporate loans were up 10.5% y/y or 5.1% y/y if adjusted for the 20.6% ruble depreciation against the dollar, VTBC estimates. Retail loan growth momentum remained strong, and the portfolio grew 22.4% y/y, slightly decelerating m/m due to seasonal repayments.

The non-performing loans (NLPs) situation has also improved as banks have profit again to deal with problem loans. The share of overdue loans notably improved both m/m and y/y, VTBC reports, which can be attributed to repayments and write-offs.

As of the end of 2018, the share of overdue amounts in the corporate portfolio was 6.3% and in retail 5.1%. The share of total provisions was also down m/m and y/y, to 8.3%, still helping the coverage ratio to improve to 177% from 171% a year ago.

Deposits are also growing again. Both retail and corporate accounts posted solid growth: 9.5% y/y and 12.7% y/y, respectively at the end of 2018.

Excluding the FX factor, both segments grew 5.5% y/y. CBR funds declined 14.5% m/m, yet were up 29.3% y/y.