Bank IPOs in 2025: Evaluating Capital, ROE, and Asset Quality
The wave of bank IPOs expected on the Russian stock market in 2025-2026 will require investors to have a deep understanding of the specificities related to the valuation of credit institutions. Unlike manufacturing or technology companies, where key metrics include revenue, EBITDA, and cash flow, banks are assessed through the lenses of capital, profitability, and asset quality. Misinterpreting these indicators can lead to catastrophic losses, as demonstrated by the public IPO of VTB in 2007, which wiped out eighty percent of retail investors' capital within a year and a half post-listing.
Capital as the Foundation of Banking Business
Capital Adequacy and N1 Ratio
Capital adequacy defines the bank's ability to grow, absorb losses, and pay dividends without breaching regulatory limits. The central indicator is the N1 ratio, calculated as the relationship between equity and risk-weighted assets. The minimum for standard banks is eight percent, and for systemically important banks, it is ten. However, for a bank preparing for an IPO, this is categorically insufficient: the market expects a buffer of twelve to fifteen percent, providing room for maneuver in adverse scenarios while maintaining growth rates.
Capital Structure of Banks
The capital structure resembles a layered cake of varying quality, where each layer has different loss absorption capacities. Tier 1 capital, the core capital, includes common equity and retained earnings — the most reliable safety cushion from the regulator's perspective, capable of cushioning shocks without threatening bankruptcy. Additional Tier 1 capital is formed from certain types of preferred stock and perpetual subordinated instruments that may convert into common stock or be written off under certain conditions. Tier 2 capital consists of subordinated loans and part of reserves for credit impairment — less reliable elements that the regulator restricts in overall structure share.
The Significance of IPO for Capital
An IPO allows a bank to increase its Tier 1 capital, which is critically important for long-term stability and reducing funding costs. The bond market is more favorable to banks with high core capital, enabling them to borrow at lower interest rates. Investors gain confidence that the bank can survive an economic downturn without the need for emergency recapitalization at their expense.
Calculating Growth Horizon
A practical example illustrates the importance of a buffer: if a bank plans to increase its loan portfolio by thirty percent annually with an average risk-weighted ratio of eighty percent, and the capital buffer is only two percentage points above the minimum, simple 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 will consume two point four percentage points of capital, leaving the bank on the verge of violating the regulation within a year. After a year and a half, a new issuance will be necessary, inevitably diluting current shareholders.
Dividend Policy and Regulatory Constraints
Dividend policy is inextricably linked to capital and becomes a source of tense negotiations between shareholders and regulators. The central bank may limit dividend payouts if it believes the bank should direct profits towards strengthening its capital base rather than distributing them to owners. During the crisis period of 2022-2023, the regulator effectively prohibited major banks from paying out more than fifty percent of profits as dividends, disappointing investors who anticipated dividend yields of eight to ten percent annually. Before investing in an IPO, it is critically important to understand the realism of the bank's dividend strategy, taking into account regulatory constraints, growth plans, and current capital reserves.
Return on Equity: ROE as a Mirror of Efficiency
Basic Calculation of ROE
ROE, or Return on Equity, measures the bank's ability to convert the capital invested by shareholders into profit and serves as the main indicator of managerial effectiveness. The formula is simple: net profit over the period divided by average equity during the same period. For Russian banks, a comfortable range is fifteen to twenty-five percent, achieved through a high net interest margin in the context of key rates of seven to ten percent. In the era of zero interest rates, Western banks are satisfied with ROE of eight to twelve percent, making the Russian sector attractive in terms of returns 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, showing the drivers of profitability and allowing investors to understand where profits come from. 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: ROE = ROA × capital multiplier, where ROA indicates the efficiency of the active base, and the capital multiplier reflects the proportion of borrowed financing. A typical Russian bank has an ROA of one to two percent and a capital multiplier of ten to fifteen times, yielding a targeted ROE of fifteen to thirty percent. Any deviation requires explanation: low ROA indicates issues with margins or costs, while excessive leverage creates risks at the slightest deterioration in asset quality.
ROE Stability Over Time
Stability of ROE over time is critically important, as one-off effects often mask real operational efficiency. Profit spikes from the sale of non-core assets, portfolio revaluations during interest rate declines, or reversals of previously established reserves should not be misleading. Investors must analyze the profit structure over the past three to five years, separating the operational component from one-time effects, constructing a trend of "normalized" ROE. A declining trend combined with a growing portfolio signals margin compression or rising credit losses — alarming signs before an IPO, which the management might attempt to conceal behind aggregated figures.
Interpreting Anomalous ROE
Anomalously high ROE of thirty to forty percent with a low P/B ratio below one should alert any savvy investor. This is a classic sign of either a temporary effect (the bank is liquidating assets, restructuring its balance sheet, or has received one-time profits), or hidden issues with portfolio quality that the market is already discounting through a lower valuation but have not yet appeared in the official reporting. A healthy bank with a stable ROE of twenty percent should trade at a P/B ratio of one and a half to two under normal conditions. If the market shows a discount, it is essential to look for reasons for investors' distrust, checking asset quality, concentration risks, and the reputation of owners.
Asset Quality: Invisible Risks in the Loan Portfolio
NPL Indicator as a Signpost
NPL, or Non-Performing Loans, measures the proportion of troubled loans overdue by more than ninety days in 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 such as 2008-2009 or 2014-2016. Values of NPL above ten percent in peaceful times indicate systemic issues with borrower scoring, collector recovery efforts, or targeted lending to high-risk segments without adequate risk pricing. Both absolute size and dynamics are important: a rising trend in NPL for three consecutive quarters while lending rates decline signals a "zombie portfolio," where the bank has ceased issuing new loans due to issues with existing ones.
Provisioning and Coverage Ratio
Provisioning for impairment is a mirror of asset quality and the management's honesty towards investors. The coverage ratio is calculated as the ratio of formed reserves to problem loans and shows what share of potential losses the bank has already recognized through its income statement. Conservative banks provision seventy to eighty percent for retail NPL (considering collateral such as cars and guarantees) and ninety to one hundred percent for corporate loans (where recovery is more complex and prolonged), protecting capital from future write-offs. A low coverage ratio of fifty to sixty percent with a high NPL of seven to ten percent is a red flag, indicating either the management's unjustified optimism regarding recovery or an unwillingness to recognize real losses before an IPO to demonstrate better profitability.
Classification by Stages under IFRS 9
The classification of assets by stages under IFRS 9 adds nuances to the analysis, dividing the portfolio into three buckets with varying levels of provisioning. Stage 1 represents "healthy" loans without significant increases in credit risk since issuance, provisioning for expected losses over twelve months, usually zero point two to five percent of the portfolio. Stage 2 comprises loans with significantly increased risk (emergence of minor delinquencies, deterioration of the borrower's financial situation, negative news about the industry) but without formal default, with provisioning over the loan's lifetime, generally three to ten percent. Stage 3 includes troubled loans overdue by more than ninety days or with objective signs of default, with provisioning of fifty to one hundred percent depending on collateral. Investors must monitor the migration of loans between stages: a sharp increase in Stage 2 by five to ten percentage points per quarter portends a future spike in NPL within six months to a year when those loans finally deteriorate.
Concentration Risks
Concentration risks within the portfolio often remain obscured by aggregate indicators but can destroy a bank faster than an overall increase in NPL. If thirty to forty percent of the corporate portfolio is concentrated in one industry (construction, trade, metallurgy), an industry crisis will undermine the bank's capital regardless of whether the overall NPL across the portfolio appears normal. Geography is also critical: concentration of lending in a single region creates vulnerability to local economic shocks, declines in real estate prices, or bankruptcies of key enterprises. The top ten borrowers within the corporate portfolio should not exceed thirty to forty percent; otherwise, the bank depends on the fate of a few clients whose problems could spell disaster for the entire business.
Interest Margin and Balance Monetization
Net Interest Margin (NIM)
The net interest margin, NIM, is calculated as the difference between interest income and expenses divided by average interest-earning assets and indicates the effectiveness of transforming liabilities into income-generating assets. Typical NIM for Russian banks ranges from four to seven percent against key rates of seven to ten percent, significantly higher than the one and a half to two percent seen in Western banks at zero rates. A high margin compensates for increased credit risks and economic volatility but makes the business vulnerable to regulatory policy changes and intensified competition. Banks with NIM above six percent either operate in high-risk sectors (unsecured consumer lending, microfinance) or possess a unique franchise with low funding costs.
Bank Income Structure
The income structure reflects the bank's business model and the resilience of its profits to external shocks. Universal banks generate sixty to seventy percent of revenues from interest margins, twenty to thirty percent from fees for cash management services, acquiring, and asset management, with the remainder coming from trading operations in financial markets. Retail banks are more reliant on interest margins, with eighty to ninety percent of revenues, making them vulnerable to spread contraction amid heightened competition or shifts in monetary policy. Corporate and investment banks have a more diversified structure with a high share of commission income, trade financing, and underwriting, which reduces dependence on the interest cycle but creates volatility due to market turbulence.
Impact of Key Rate
The impact of the key rate on margins is ambiguous and depends on the balance sheet structure regarding maturities and types of interest rates. As rates rise, short-term loans and deposits get repriced faster than long-term ones, creating NIM volatility during the transition period. A bank dominated by longer fixed-rate mortgage loans and shorter-duration deposits suffers from rising rates, as funding costs increase faster than asset yields — a classic trap for US savings and loan associations in the 1980s. Conversely, a bank with floating rates on corporate loans and term deposits for individuals benefits from rising rates, as it can quickly enhance asset yields while delaying the rise in liability costs. Analyzing the gap report — the difference between assets and liabilities across time buckets — is critical for forecasting future margin performance.
Competitive Pressure
Competition in the banking sector relentlessly compresses margins in the long run. Digital banks with low cost bases can offer more favorable deposit rates of eight to nine percent compared to six to seven percent with traditional banks and cheaper loans at fifteen percent versus eighteen percent, forcing incumbents to lower spreads to retain customers. In developed countries, this process has been ongoing for decades, resulting in current margins of one and a half to two percent. Russia is still protected by high rates and an oligopolistic market structure, with the top five banks controlling sixty percent of assets, but the trend is inevitable. A bank demonstrating stable or growing NIM amidst increasing competition either possesses a unique franchise or has hidden asset quality issues that have yet to manifest in the Cost of Risk.
Cost of Risk: The Price of Credit Losses
Defining Cost of Risk
Cost of Risk, or CoR, measures the share of revenue that a bank is forced to allocate to provisions for credit losses and serves as a critical indicator of underwriting quality. The formula is: net provisions made during the period (new provisions minus recoveries) divided by the average loan portfolio, with results expressed in percentages 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 an aggressive lending policy with excessive risks in pursuit of volume or a sudden deterioration in the quality of the existing portfolio due to an economic downturn or industry crisis.
The Influence of CoR on Profitability
CoR directly impacts profitability through simple but harsh arithmetic of revenues and expenses. If NIM is five percent and operational expenses are three percent of assets (Cost-to-Income of sixty percent), with CoR at one percent, then the operating profit before taxes amounts to one percent of assets, which at a capital multiplier of ten yields an ROE of ten percent pre-tax or seven to eight percent post-tax. An increase in CoR to two percent reduces operating profit to zero, while at three percent, the bank incurs an operational loss. Therefore, even a small change in the cost of risk by fifty to one hundred basis points radically alters the investment case and fair valuation.
Dynamics as an Indicator of Problems
The dynamics of CoR serves as an early indicator of problems, often ahead of the official NPL figures by two to three quarters. An upward trend for two to three consecutive quarters with stable or even declining NPL signals that the bank is finally recognizing hidden portfolio issues by increasing provisions for Stage 2 loans that have not formally become problematic but are clearly heading in that direction. A declining CoR amid rising NPL is the opposite red flag, indicating manipulations with reserves: the bank artificially underreports provisions to show profits before the IPO, shifting problems onto future shareholders. A healthy pattern is a stable CoR around one hundred and fifty basis points with minor cyclical fluctuation of plus or minus thirty points around the trend.
Segmentation of CoR by Portfolios
Comparing CoR across segments of the portfolio reveals risk profiles and the quality of pricing in each business. Retail unsecured loans (credit cards, payday loans) exhibit CoR of three to five percent, compensated by high interest rates of fifteen to twenty-five percent and rapid portfolio turnover. Mortgages present CoR of zero point five to one percent due to collateralized properties and thorough creditworthiness underwriting. Auto loans range from one and a half to two percent. Corporate lending varies from one to three percent depending on the size and quality of borrowers: reliable large corporations report one percent, while medium businesses report two to three percent. A bank with anomalously low CoR in high-risk segments either possesses unique competencies in scoring and collections or inadequately reserves losses, creating a ticking time bomb.
P/B Multiplier: Premium to Book Value
Basics of P/B Calculation
Price-to-Book, the ratio of market capitalization to the book value of equity under IFRS, serves as the cornerstone of bank valuation and the main benchmark for fair IPO pricing. The book value per share represents the equity divided by the number of shares and shows how many net assets are attributable to each share and what the liquidation value would be under hypothetical bankruptcy conditions. Russian banks trade at P/B values ranging from 0.5 to 1.5 depending on quality and prospects, starkly contrasting with multipliers of three to five for technology companies or two to three for consumer brands.
Reasons for Discount to Book Value
The reason behind the chronic discount to book value lies in investors' distrust of asset quality and profit sustainability in a cyclical business. Book value relies on accounting estimates of loans net of provisions, but the true market value of the portfolio can be substantially lower due to inadequate reserving, unexpected macroeconomic deterioration, or realization of concentration risks. A P/B ratio below one indicates that the market believes: under hypothetical liquidation of the bank and sale of the portfolio to other financial institutions, shareholders would receive less than book value, as buyers would demand discounts due to risks and integration costs.
Residual Income Model
The relationship between P/B and ROE is mathematically derived through the residual income model proposed in the 1970s for valuing financial institutions. Fair P/B equals one plus (ROE minus cost of capital) divided by (cost of capital minus growth rate). If a bank consistently generates ROE of twenty percent, with cost of equity (investors' required return) at twelve percent and a long-term sustainable growth rate of five percent, the fair P/B equals 1 + (20%-12%)/(12%-5%) = 2.14. Any deviation of the market valuation from this theoretical value can be attributed to risk perception: the market discounts future ROE due to doubts about the sustainability of the business model, asset quality, and management's adaptability to a changing environment.
Tangible Book Value
Tangible book value, the material book value, cleanses the capital of intangible assets such as goodwill from past acquisitions, capitalized brand value, and deferred tax assets of questionable realizability. For most Russian banks, the difference between book value and tangible book value is small, around five to ten percent, but after significant M&A transactions, substantial goodwill may accumulate in the balance sheet, artificially inflating book value by twenty to thirty percent. The multiplier P/TBV offers a more conservative valuation, excluding assets of questionable liquidation value and focusing on the "hard" elements of capital.
Operational Efficiency and Cost Control
Cost-to-Income as an Efficiency Indicator
The Cost-to-Income ratio, the ratio of operational expenses to operational incomes, serves as an indicator of operational efficiency and the bank's ability to compete in a price war. The best digital banks display figures of thirty to forty percent, meaning that for every ruble of income, forty kopecks are spent on salaries, rent, IT, marketing, with the remaining sixty covering credit losses and generating profits. Traditional banks with sprawling branch networks tend to flounder in the fifty to seventy percent range as they spend huge resources maintaining physical infrastructure and bloated staff.
The Impact of Efficiency on Competitiveness
Each percentage point difference in Cost-to-Income translates into a competitive edge: with the same NIM of five percent, a bank with a cost structure of forty percent will have operating profit of three percent of assets, while a bank with costs of sixty percent will have two percent, showcasing a difference of one and a half times. This advantage can be leveraged for aggressive pricing (lower rates on loans, higher on deposits), technology investments, or higher dividend payouts. Banks with Cost-to-Income above seventy percent are destined for extinction amid digital transformation unless they implement radical optimization.
Structure of Operational Expenses
The structure of operational expenses indicates management priorities and optimization potential. Personnel expenses usually make up forty to fifty percent of operational costs, depreciation and rent twenty to thirty percent, IT and marketing ten to twenty percent, and others around ten. Banks that intensively invest in technology (with IT expenses representing twenty to thirty percent) lay the groundwork for the future by automating processes and creating digital products. Banks with bloated personnel expenses of sixty percent and a low share of IT at five to ten percent live in the past and risk being displaced by more efficient competitors.
Comprehensive Assessment Practices
Capital Assessment Checklist
Synthesizing all the discussed metrics into a cohesive picture requires a systematic approach and a sequential checklist review. Start with capital: an N1 ratio of at least twelve percent, Tier 1 making up no less than eighty percent of total capital, and the dividend policy proposing payouts of no more than sixty to seventy percent of profits. Calculate the growth horizon without new issuances: (capital buffer in percentage points) / (asset growth rate × risk coefficient). If the result is less than three years — the risk of dilution is high.
Profitability and Asset Quality Analysis
Check the stability of ROE five years ago, perform a Dupont decomposition, and separate operational profit from one-off effects of asset sales, portfolio revaluations, and reserve recoveries. Normalized ROE should be in the range of fifteen to twenty-five percent with volatility of no more than three to five percentage points year-on-year. Compare ROE with P/B: at ROE of twenty percent, fair P/B is around two; a discount of more than thirty percent warrants a search for hidden problems.
Evaluate asset quality comprehensively: NPL three to seven percent, coverage ratio seventy to one hundred percent, CoR one hundred to two hundred basis points, and migration into Stage 2 not more than two to three percentage points per quarter. 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.
Margin and Efficiency Assessment
Review interest margin and income structure: NIM of four to seven percent stable over the past two years, with interest income accounting for sixty to eighty percent, and fee income for twenty to forty percent. Examine the gap report for interest risk: the difference between assets and liabilities with repricing within a year should not exceed twenty percent of capital. Cost-to-Income below sixty percent and a growing share of IT expenditures are positive signals of competitiveness.
Peer Group Comparative Analysis
The final touch is to create a peer comparison table including five to seven peers by size and business model. Compare P/B, ROE, NPL, CoR, NIM, and Cost-to-Income. If the evaluated bank is trading at a premium to the median with average or worse operational performance — it indicates clear overvaluation. A discount with superior metrics represents a potential opportunity, but be sure to investigate reasons for the undervaluation: the market may be aware of forthcoming problems not reflected in the latest reporting.
Macroeconomic Context and Timing
Finally, never forget about the macroeconomic context and timing. Bank IPOs with a key rate of sixteen to twenty percent compete with risk-free OFZs, which offer similar returns without capital loss risks. The ideal window for listings is a stable or declining rate of seven to ten percent, rising credit demand, low market volatility, and absence of geopolitical shocks. Improper timing can doom even quality banks, as evidenced by the 2007 VTB experience, which went public at the absolute market peak three months before the collapse.
