Bank IPOs in 2025: Evaluating Capital, ROE, and Asset Quality
The wave of banking IPOs expected in the Russian equity market during 2025-2026 will demand from investors a deep understanding of the nuances involved in assessing credit institutions. Unlike manufacturing or technology companies, where key metrics include revenue, EBITDA, and cash flow, banks are evaluated through the lens of capital, profitability, and asset quality. A misinterpretation of these indicators can lead to catastrophic losses, as demonstrated by the retail IPO of VTB in 2007, which wiped out eighty percent of retail investor capital within a year and a half after the offering.
Capital as the Foundation of Banking Business
Capital Adequacy and the N1 Ratio
Capital adequacy determines a bank's ability to grow, absorb losses, and pay dividends without breaching regulatory limits. The central metric is the N1 ratio, calculated as the ratio of equity to risk-weighted assets. For typical banks, the minimum is eight percent; for systemically important banks, it is ten percent. However, for a bank preparing for an IPO, this is categorically insufficient: the market expects a buffer between twelve to fifteen percent, allowing room for maneuver in adverse scenarios while maintaining growth rates.
Structure of Banking Capital
The structure of capital resembles a layered cake of varying quality, where each layer has differing capacities to absorb losses. The core capital, or Tier 1 capital, includes common stock and retained earnings — the most secure buffer from a regulatory perspective, capable of cushioning shocks without threatening bankruptcy. Additional Tier 1 capital is formed from specific types of preferred shares and perpetual subordinated instruments that may, under certain conditions, convert into common stock or be written off. Tier 2 capital consists of subordinated debt and portions of reserves for credit impairment — less reliable elements that regulators restrict in their share of the total structure.
The Importance of IPO for Capital
An IPO allows a bank to bolster its Tier 1 capital, which is critically important for long-term sustainability and reducing funding costs. The bond market tends to favor banks with higher core capital, enabling them to borrow at lower rates. Investors gain confidence that the bank can weather economic downturns without needing emergency recapitalization at their expense.
Calculating Growth Horizon
A practical example illustrates the importance of buffers: if a bank plans to grow its loan portfolio by thirty percent annually at an average risk coefficient of eighty percent, and its capital buffer is merely two percentage points above the minimum, basic arithmetic reveals a problem. A thirty percent increase in the portfolio raises risk-weighted assets by twenty-four percent. With an initial N1 of ten percent, this "eats" two point four percentage points of capital, leaving the bank on the verge of breaching regulatory limits within a year. A year and a half later, a new equity issue will be required, leading to inevitable dilution for current shareholders.
Dividend Policy and Regulatory Restrictions
Dividend policy is intrinsically linked to capital and becomes a battleground for tense negotiations between shareholders and regulators. The central bank can restrict shareholder payouts if it believes the bank should allocate profits to strengthen its capital base instead of distributing them to owners. During the crisis period of 2022-2023, the regulator effectively prohibited the largest banks from paying out more than fifty percent of profits as dividends, disappointing investors who had expected a dividend yield of eight to ten percent per annum. Prior to participating in an IPO, it is vital to understand the realism of the bank's dividend strategy considering regulatory constraints, growth plans, and current capital buffer.
Profitability of Capital: ROE as a Mirror of Efficiency
Basic Calculation of ROE
ROE, or Return on Equity, measures a bank’s ability to convert equity invested by shareholders into profit and serves as the primary indicator of management efficiency. The formula is straightforward: net income for the period divided by average equity for the same period. For Russian banks, a comfortable zone is between fifteen to twenty-five percent, achievable due to a high net interest margin in an environment with key rates of seven to ten percent. Western banks in a zero-rate era are satisfied with ROE of eight to twelve percent, making the Russian sector attractive in terms of yield but simultaneously risky due to macroeconomic volatility and the cyclicality of lending.
Dupont Model and ROE Decomposition
The Dupont model breaks down ROE into components, showcasing the drivers of profitability and allowing investors to understand where profits originate. ROE equals the product of net margin (profit to revenue), asset turnover (revenue to assets), and financial leverage (assets to equity). For banks, the formula simplifies to: ROE = ROA × capital multiplier, where ROA indicates the efficiency of utilizing the asset base, and the capital multiplier reflects the share of debt financing. A typical Russian bank has an ROA of one to two percent and a capital multiplier of ten to fifteen, resulting in a target ROE of fifteen to thirty percent. Any deviation requires explanation: low ROA signals issues with margin or costs, while excessive leverage poses risks at the slightest deterioration in asset quality.
ROE Stability Over Time
The stability of ROE over time is critically important, as one-off effects often mask true operational efficiency. Spikes in profits from the sale of non-core assets, revaluation of securities portfolios during falling rates, or the reversal of previously created reserves should not mislead investors. Investors must analyze the profit structure over the past three to five years, isolating operating components from one-off effects and constructing a trend of "normalized" ROE. A declining trend amid a growing portfolio signals margin compression or rising credit losses — alarming signs ahead of an IPO that management may attempt to hide behind aggregated figures.
Interpreting Abnormal ROE
An abnormally high ROE of thirty to forty percent with a low P/B multiplier below one should raise red flags for any savvy investor. This is a classic sign of either a temporary effect (the bank is liquidating assets, restructuring its balance, or has recorded one-time profits) or concealed problems with portfolio quality, which the market is already discounting through a low valuation yet haven't manifested in official reporting. A healthy bank with a stable ROE of twenty percent should trade at a P/B of one and a half to two, all else being equal. If the market shows a discount, it is essential to seek the causes of investor mistrust, examining asset quality, concentration risks, and the reputation of the owners.
Asset Quality: Invisible Risks of the Loan Portfolio
NPL Ratio as an Indicator
NPL, or Non-Performing Loans, measures the share of problematic loans overdue for more than ninety days within the total portfolio and serves as a primary indicator of underwriting quality. For Russian banks, a normal range is three to seven percent during stable periods, with spikes up to ten to fifteen percent during crises like 2008-2009 or 2014-2016. NPL values above ten percent during peaceful times indicate systemic issues with borrower scoring, collection practices, or targeted lending to high-risk segments without adequate risk price modeling. It is crucial not just to consider the absolute figure, but also the dynamics: a rising NPL trend for three consecutive quarters amid declining lending rates signals a "zombie portfolio," where the bank has ceased issuing new loans due to issues with existing ones.
Reserving and Coverage Ratio
Reserves for impairment reflect asset quality and the honesty of management towards investors. The coverage ratio is calculated as the ratio of formed reserves to problematic loans, demonstrating what portion of potential losses the bank has already acknowledged via the profit and loss statement. Conservative banks reserve seventy to eighty percent for retail NPLs (considering collateral such as vehicles, guarantees) and ninety to one hundred percent for corporate loans (where recovery is more complex and lengthy), protecting capital from future write-offs. A low coverage ratio of fifty to sixty percent with high NPLs of seven to ten percent signals a red flag, indicating either unjustified optimism from management regarding recoveries or unwillingness to acknowledge real losses ahead of the IPO to showcase better profits.
Classification by IFRS 9 Stages
The classification of assets by IFRS 9 stages adds nuances to the analysis, dividing the portfolio into three buckets with varying levels of reserve provisions. Stage 1 comprises "healthy" loans with no significant increase in credit risk since origination, with provisioning for expected losses for twelve months, usually zero point two to five percent of the portfolio. Stage 2 includes loans with a significantly increased risk (emergence of minor delinquencies, worsening financial conditions of the borrower, negative news regarding the industry) but without formal default, with lifetime provisioning, typically three to ten percent. Stage 3 consists of problematic loans overdue for more than ninety days or with objective signs of default, requiring provisioning of fifty to one hundred percent depending on collateral. Investors should monitor the migration of loans between stages: a sharp rise in Stage 2 by five to ten percentage points per quarter foretells a future spike in NPLs within six to twelve months when these loans finally deteriorate.
Concentration Risks
Concentration risks within the portfolio often remain concealed within aggregated metrics but can destroy a bank faster than overall NPL growth. If thirty to forty percent of the corporate portfolio is concentrated in one industry (construction, trade, metallurgy), an industry downturn can obliterate a bank's capital regardless of the total portfolio's NPL seeming normal. Geography is also critical: concentration of lending in one region creates vulnerability to local economic shocks, declines in real estate prices, or bankruptcies of economically significant enterprises. The top ten borrowers within the corporate portfolio should not exceed thirty to forty percent; otherwise, the bank is dependent on the fate of a few clients, whose issues could spell disaster for the entire business.
Interest Margin and Balance Monetization
Net Interest Margin (NIM)
Net Interest Margin, NIM, is calculated as the difference between interest income and expenses divided by average interest-earning assets, showcasing the efficiency of transforming liabilities into income-generating assets. Typical NIM for Russian banks ranges from four to seven percent with key rates at seven to ten percent, which is significantly higher than the one to two percent seen in Western banks under zero rates. A high margin compensates for increased credit risks and economic volatility but makes the business vulnerable to changes in regulatory policy and intensified competition. Banks with NIM exceeding six percent operate in high-risk segments (unsecured consumer lending, microfinance) or possess unique franchises with low deposit costs.
Bank Income Structure
The income structure reveals the bank's business model and profit resilience to external shocks. Universal banks generate sixty to seventy percent of income from interest margins, twenty to thirty percent from commissions for cash management services, acquiring, and asset management, with the remainder coming from trading operations in financial markets. Retail banks are more dependent on interest margins, earning eighty to ninety percent of income, making them vulnerable to margin compression during intensified competition or shifts in monetary policy. Corporate and investment banks have a more diversified structure with a higher share of fee income, trade financing, and managing placements, reducing dependence on the interest cycle yet exposing them to volatility from market turbulence.
Impact of Key Rate
The impact of the key rate on margins is ambiguous, depending on the balance sheet's structure in terms of maturity and interest rate types. When rates rise, short-term loans and deposits are re-evaluated faster than long-term ones, causing volatility in NIM during the transition period. A bank heavy in long-term fixed-rate mortgages and short-term deposits suffers from rising rates, as funding costs increase faster than asset yields — a classic trap exemplified by U.S. savings and loan associations in the eighties. Conversely, banks with floating rates on corporate loans and term deposits for individuals benefit from rate increases, as they can quickly elevate asset yields while liabilities' costs lag. Analyzing the gap report — the difference between assets and liabilities across temporal buckets — is critical for forecasting future margin profitability.
Competitive Pressure
Competition within the banking sector inexorably compresses margins long-term. Digital banks with a low cost base can offer more favorable rates on deposits of eight to nine percent against six to seven percent from traditional banks, and cheaper loans at fifteen percent against eighteen, compelling incumbents to reduce spreads to retain clients. In developed countries, this process has unfolded over decades, leading to current margins of one to two percent. Russia remains shielded by high rates and an oligopolistic market structure, where the five largest banks control sixty percent of assets, but the trend is inevitable. A bank showing stable or growing NIM amid increasing competition possesses either a unique franchise or underlying issues with portfolio quality that have yet to surface in Cost of Risk.
Cost of Risk: The Price of Credit Losses
Defining Cost of Risk
Cost of Risk, CoR, measures the portion of revenue the bank must allocate to reserves for credit losses and serves as a critical indicator of underwriting quality. The formula is: net reserves created during the period (new reserves minus recoveries) divided by the average loan portfolio, expressed as a percentage or basis points. Healthy values for Russian banks range from one to two percent, or one hundred to two hundred basis points; anything above three percent indicates either aggressive lending practices with excessive risks in pursuit of volume or a sudden deterioration of the existing portfolio's quality due to economic downturns or industry crisis.
The Impact of CoR on Profitability
CoR directly influences profitability through simple yet rigid arithmetic of revenues and expenses. If NIM is five percent and operational expenses are three percent of assets (Cost-to-Income ratio of sixty percent), with a CoR of one percent, then operating profit before tax accounts for one percent of assets, which at a tenfold capital multiplier results in ROE of ten percent before taxes or seven to eight percent after. If CoR rises to two percent, operating profit falls to zero; at three percent, the bank enters operational loss. Therefore, even a small change in cost of risk by fifty to one hundred basis points fundamentally alters the investment case and fair valuation.
Dynamics as an Indicator of Problems
The dynamics of CoR serve as an early indicator of problems, often preceding official NPL figures by two to three quarters. An increasing trend for two to three consecutive quarters amid stable or even declining NPL signals that the bank is finally acknowledging concealed portfolio issues through increased reserves for Stage 2 loans that have not yet become problematic but are clearly heading in that direction. Conversely, a declining CoR alongside rising NPL is a warning sign indicating reserve manipulation: the bank is artificially reducing provisions to showcase profits ahead of the IPO, shifting problems onto future shareholders. A healthy pattern would be a stable CoR around one hundred and fifty basis points with minor cyclical fluctuations of plus or minus thirty basis points around the trend.
Segmenting CoR by Portfolio
Comparing CoR across portfolio segments reveals risk profiles and pricing quality in each business. Unsecured retail loans (credit cards, payday loans) exhibit CoR ranging from three to five percent, compensated by high interest rates of fifteen to twenty-five percent and a swift portfolio turnover. Mortgages demonstrate CoR of zero point five to one percent due to real estate collateral and meticulous creditworthiness assessment. Auto loans range from one to two percent. Corporate lending varies from one to three percent depending on the size and quality of borrowers: large, reliable corporations at one percent and SMEs at two to three. A bank with abnormally low CoR in high-risk segments either possesses unique scoring and collection competencies or is under-reserving losses, creating a ticking time bomb.
P/B Multiplier: Premium to Book Value
Foundations of the P/B Calculation
Price-to-Book, the ratio of market capitalization to the IFRS book value of equity, serves as the cornerstone of bank valuation and the primary benchmark for fair IPO pricing. The book value per share — total equity divided by the number of shares — indicates how many net assets are available per share and represents the liquidation value in hypothetical bankruptcy. Russian banks trade at a P/B ranging from 0.5 to 1.5 depending on quality and prospects, a striking contrast to multipliers of three to five for technology companies or two to three for consumer brands.
Reasons for Discount to Book Value
The chronic discount to book value stems from investor distrust concerning asset quality and profit sustainability in a cyclical business. Book value relies on the accounting valuation of loans net of provisions, but the true market value of the portfolio may be significantly lower due to insufficient provisioning, unexpected macroeconomic downturns, or realization of concentration risks. A P/B below one indicates that the market believes: in hypothetical liquidation of the bank and the sale of its portfolio to other credit organizations, shareholders would receive less than the book value, as purchasers would demand a discount for risks and integration costs.
Residual Income Model
The connection between P/B and ROE is mathematically justified through the residual income model proposed in the seventies for assessing financial institutions. The fair P/B equals one plus (ROE minus cost of equity) divided by (cost of equity minus growth rate). If a bank consistently achieves ROE of twenty percent, the cost of equity (required by investors) is twelve percent, and long-term sustainable growth rate is five percent, the fair P/B calculates to 1 + (20%-12%)/(12%-5%) = 2.14. Any deviation of market valuation from this theoretical figure is explained by risk perception: the market discards future ROE due to doubts about the sustainability of the business model, asset quality, and management’s ability to adapt to the changing environment.
Tangible Book Value
Tangible book value purges equity of intangible assets like goodwill from previous acquisitions, capitalized brands, and deferred tax assets of questionable realizability. For most Russian banks, the difference between book value and tangible book value is minor, around five to ten percent, but after large M&A transactions, there can be significant goodwill on the balance sheet, artificially inflating book value by twenty to thirty percent. The P/TBV multiplier provides a more conservative valuation by excluding doubtful liquidation-value assets and focusing on the "solid" elements of capital.
Operational Efficiency and Cost Control
Cost-to-Income as an Efficiency Indicator
The Cost-to-Income ratio, a measure of operational expenses relative to operating income, serves as an indicator of operational efficiency and a bank's ability to compete in pricing wars. Top digital banks demonstrate ratios of thirty to forty percent, implying that for every ruble of income, forty kopecks are spent on salaries, rent, IT, and marketing, while the remaining sixty percent covers credit losses and profit generation. Traditional banks with extensive branch networks struggle with ratios between fifty to seventy percent, expending vast resources on maintaining physical infrastructure and bloated staff.
The Impact of Efficiency on Competitiveness
Each percentage point difference in Cost-to-Income transforms into a competitive advantage: with identical NIM of five percent, a bank with costs of forty percent achieves an operating profit of three percent of assets, while a bank with sixty percent costs achieves only two percent, yielding a difference of one and a half times. This advantage can be leveraged for aggressive pricing strategies (lower loan rates, higher deposit rates), technology investments, or higher dividend payouts. Banks with Cost-to-Income ratios above seventy percent are likely to face extinction amid digital transformation unless they undergo radical optimization.
Structure of Operational Expenses
The structure of operational expenses illustrates management priorities and optimization potential. Personnel costs typically account for forty to fifty percent of operational expenses, depreciation and rent for twenty to thirty percent, IT and marketing for ten to twenty percent, and the remainder for other expenses. Banks that heavily invest in technology (with IT expenses making up twenty to thirty percent) are laying the groundwork for future, automating processes and developing digital products. Banks with inflated personnel costs of sixty percent and low IT expenses of five to ten percent are living in the past and risk being superseded by more efficient competitors.
Comprehensive Assessment Practices
Capital Assessment Checklist
Synthesizing all the metrics discussed into a unified picture requires a systematic approach and step-by-step checklist. Start with capital: an N1 minimum of twelve percent, Tier 1 at least eighty percent of total capital, and a dividend policy allowing for payouts of no more than sixty to seventy percent of profits. Calculate the growth horizon without a capital increase: (capital buffer in percentage points) / (asset growth rate × risk coefficient). If the result is under three years, the risk of dilution is high.
Profitability and Asset Quality Analysis
Examine the stability of ROE over the past five years, build Dupont decomposition to separate operating profit from one-off effects such as asset sales, portfolio revaluations, or reserve recoveries. The normalized ROE should lie within the range of fifteen to twenty-five percent, with volatility not exceeding three to five percentage points year on year. Compare ROE with P/B: at a ROE of twenty percent, the fair P/B is about two; a discount of more than thirty percent necessitates investigation for hidden problems.
Evaluate asset quality comprehensively: NPLs of three to seven percent, coverage ratio of seventy to one hundred percent, and CoR of one hundred to two hundred basis points, with migration to Stage 2 not exceeding two to three percentage points quarterly. Check concentration: the top industry should not exceed thirty percent of the corporate portfolio, the top region no more than forty percent, and the top ten borrowers no more than forty percent. Any exceedance is a red flag.
Assessing Margin and Efficiency
Interest margin and income structure: the NIM should be stable in the four to seven percent range over the past two years, with interest income accounting for sixty to eighty percent and fee income for twenty to forty percent. Review the gap report for interest rate risk: the difference between assets and liabilities with re-evaluation up to one year should not exceed twenty percent of capital. Cost-to-Income below sixty percent and a rising share of IT expenses are positive competitiveness signals.
Peer Group Comparative Analysis
The final stroke is constructing a peer comparison table comprising five to seven similar-sized counterparts. Compare P/B, ROE, NPL, CoR, NIM, and Cost-to-Income. If the evaluated bank trades at a premium to the median despite average or poorer operational metrics — this indicates clear overvaluation. A discount amid superior metrics presents a potential opportunity, but always identify the reasons for underestimation: the market may be aware of impending issues not reflected in the latest reports.
Macroeconomic Context and Timing
Lastly, never forget the macroeconomic context and timing. Bank IPOs with key rates ranging from sixteen to twenty percent compete with risk-free OFZs, offering comparable returns without risk of capital loss. The ideal window for placements is a stable or declining rate between seven to ten percent, growing lending, low market volatility, and absence of geopolitical shocks. Poor timing could doom a quality bank, as evidenced by VTB's 2007 experience, which launched at the absolute peak of the market just three months before the collapse.
