Bank IPOs in 2025: How to Evaluate Capital, ROE, and Asset Quality
The wave of bank IPOs anticipated by the Russian stock market in 2025-2026 will require investors to possess a profound understanding of the specific evaluation of credit institutions. Unlike manufacturing or technology companies, where key metrics include revenue, EBITDA, and cash flow, banks are assessed through the lens of capital, profitability, and asset quality. Misinterpreting these indicators can lead to catastrophic losses, as demonstrated by VTB's retail IPO in 2007, which wiped out eighty percent of retail investor capital within a year and a half post-listing.
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 violating regulatory constraints. The central indicator is the N1 ratio, calculated as the ratio of owned funds to risk-weighted assets. For ordinary banks, the minimum is eight percent, and for systemically significant banks, it is ten percent. 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 manoeuvre during adverse scenarios while maintaining growth rates.
Structure of Bank Capital
The capital structure resembles a layered cake of varying quality, where each layer has a different capacity to absorb losses. Tier 1 capital includes ordinary shares and retained earnings—the most reliable safety cushion from a regulator's perspective, capable of absorbing shocks without threatening bankruptcy. Additional Tier 1 capital is formed from specific types of preferred shares and perpetual subordinated instruments that may convert to ordinary shares or be written off under certain conditions. Tier 2 capital consists of subordinated loans and part of the provisions for loan impairments—less reliable elements that regulators limit as a proportion of the total structure.
The Importance of IPOs for Capital
The public offering allows the bank to increase its basic Tier 1, which is critically important for long-term stability and reducing funding costs. The bond market is more favourable towards banks with high base capital, allowing them to borrow at lower rates. Investors, in turn, gain assurance that the bank will survive an economic downturn without the need for emergency recapitalisation at their expense.
Calculating the Growth Horizon
A practical example illustrates the importance of the buffer: if a bank plans to increase its loan portfolio by thirty percent annually, with a weighted average risk ratio of eighty percent, and its capital buffer is merely two percentage points above the minimum, simple arithmetic reveals a problem. A thirty percent portfolio growth increases risk-weighted assets by twenty-four percent. With an initial N1 ratio of ten percent, this will consume two point four percentage points of capital, leaving the bank on the brink of regulatory violation within a year. In a year and a half, a new equity issue will be required, inevitably diluting current shareholders.
Dividend Policy and Regulatory Restrictions
Dividend policy is inextricably linked to capital and becomes a field for tense negotiations between shareholders and the regulator. The central bank can restrict payments to shareholders if it deems the bank should use profits to strengthen its capital base rather than distribute 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 in dividends, disappointing investors who anticipated dividend yields of eight to ten percent per annum. Understanding the realism of a bank's dividend strategy in light of regulatory constraints, growth plans, and current capital reserves is critically important before participating in an IPO.
Return on Equity: ROE as a Mirror of Efficiency
Basic ROE Calculation
ROE, or Return on Equity, measures a bank's ability to convert shareholders' invested capital into profits and serves as the primary indicator of management efficiency. The formula is straightforward: net profit for the period is divided by the average equity for the same period. For Russian banks, the comfortable zone is fifteen to twenty-five percent, achievable due to a high net interest margin in conditions of key rates at seven to ten percent. Western banks in the era of zero rates 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.
The DuPont Model and ROE Decomposition
The DuPont model breaks down ROE into its components, showing profitability drivers and enabling investors to understand the sources of profit. 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 using the active 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 times, resulting in a target ROE of fifteen to thirty percent. Any deviation requires explanation: a low ROA indicates issues with margins or costs, while excessive leverage creates risks at the slightest deterioration in asset quality.
ROE's Stability Over Time
The 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 amid rate drops, or reversals of previously created provisions should not mislead. Investors are obliged to analyse the profit structure over the last three to five years, separating operational components from one-off effects and building a trend of “normalised” ROE. A declining trend amid a growing portfolio signals margin compression or rising credit losses—warning signs ahead of an IPO that management may want to conceal behind aggregated figures.
Interpreting Abnormal ROE
An abnormally 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 either of a temporary effect (the bank is selling off assets, restructuring its balance sheet, or received a one-off profit) or hidden quality issues within the portfolio that the market is already discounting through a low valuation but which have yet to manifest in official reporting. A healthy bank with a stable ROE of twenty percent should trade with a P/B of one and a half to two under similar conditions. If the market shows a discount, it is essential to seek reasons for investor distrust, checking asset quality, concentration risks, and the reputation of owners.
Asset Quality: Invisible Risks in the Loan Portfolio
The NPL Indicator as a Marker
NPL, or Non-Performing Loans, measures the proportion of problematic loans overdue by 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 such as 2008-2009 or 2014-2016. NPL values above ten percent in peacetime indicate systemic issues with borrower scoring, collections, or directed lending to high-risk segments without adequate risk pricing. Not only the absolute figure is important, but also its dynamics: a rising NPL trend for three consecutive quarters alongside declining lending rates signals a “zombie portfolio,” where the bank has ceased issuing new loans due to issues with existing ones.
Provisions and Coverage Ratio
Provisions for impairments serve as a mirror of asset quality and management's honesty with investors. The coverage ratio is calculated as the ratio of established provisions to problematic loans and indicates what portion of potential losses the bank has already recognised through the profit and loss statement. Conservative banks provision seventy to eighty percent of retail NPLs (considering collateral such as cars, guarantees) and ninety- to one hundred percent of corporate loans (where collections are more complex and time-consuming), protecting capital from future write-downs. A low coverage ratio of fifty to sixty percent with high NPLs of seven to ten percent raises a red flag, indicating either unfounded optimism from management regarding collections or unwillingness to acknowledge real losses ahead of the IPO to demonstrate better profits.
Classification by IFRS 9 Stages
Classifying assets by IFRS 9 stages adds nuance to the analysis, dividing the portfolio into three buckets with varying levels of provisioning. Stage 1 includes “healthy” loans with no significant increase in credit risk since issuance, with provision for expected losses over twelve months, typically zero point two to five percent of the portfolio. Stage 2 features loans with significantly increased risks (the emergence of minor defaults, deterioration of the borrower's financial position, negative news about the sector) but without formal default, with provisioning for the entire life of the loan, usually three to ten percent. Stage 3 includes problematic loans with defaults exceeding ninety days or objective signs of default, requiring provisions of fifty to one hundred percent depending on guarantees. Investors should track the migration of loans between stages: a sharp increase in Stage 2 by five to ten percentage points per quarter heralds a future spike in NPLs in six months to a year when those loans finally deteriorate.
Concentration Risks
Portfolio concentration risks often remain hidden amid aggregated indicators but can destroy a bank faster than an overall rise in NPLs. If thirty to forty percent of the corporate portfolio is concentrated in one industry (construction, trade, metallurgy), an industry crisis will devastate the bank's capital regardless of the overall NPL across the portfolio appearing normal. Geography is also critical: concentration of lending in one region creates vulnerability to local economic shocks, falling property prices, and bankruptcies of key enterprises. The top ten borrowers of a corporate portfolio should not exceed thirty to forty percent; otherwise, the bank relies on the fate of a few clients, whose problems can lead to disaster for the entire business.
Interest Margin and Balance Monetisation
Net Interest Margin (NIM)
Net interest margin, NIM, is calculated as the difference between interest income and expenses divided by average interest-earning assets, reflecting the efficiency of transforming liabilities into income-generating assets. Typical NIMs for Russian banks range from four to seven percent with key rates at seven to ten percent, significantly higher than the one to two percent seen in Western banks with 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 NIMs above six percent either operate in high-risk segments (unsecured consumer lending, microfinancing) or possess a unique franchise with low deposit costs.
Bank Income Structure
The income structure indicates the bank's business model and the resilience of profits against external shocks. Universal banks generate sixty to seventy percent of revenues from the interest margin, twenty to thirty percent from fees for transactional services, acquiring, and asset management, while the remainder comes from trading operations in financial markets. Retail banks are more reliant on the interest margin, with eighty to ninety percent of revenues, rendering them vulnerable to spread compression amid increased competition or changes in monetary policy. Corporate and investment banks feature a more diversified structure with a high share of fee income, trade finance, and placements, reducing dependence on the interest cycle but creating volatility amid market turbulence.
The Impact of the Key Rate
The impact of the key rate on margin is ambiguous and depends on the balance sheet structure in terms of maturity and type of interest rates. When rates rise, short-term loans and deposits are revalued more quickly than long-term ones, causing NIM volatility during transition periods. A bank dominated by long fixed-rate mortgage loans and short deposits suffers from rising rates, as the cost of funding grows faster than asset yields—illustrating a classic trap for savings and loan associations in the US during the eighties. Conversely, a bank with floating rates on corporate loans and term deposits for individuals benefits from rising rates, as it can quickly increase asset yields while the cost of liabilities is delayed. Conducting a gap analysis—comparing the timing of assets and liabilities—is critical for forecasting future margins.
Competitive Pressure
Competition in the banking sector relentlessly compresses margins in the long term. Digital banks with a low cost base can offer more attractive deposit rates of eight to nine percent compared to six to seven percent for traditional banks and cheaper loans at fifteen percent instead of eighteen, forcing incumbents to lower spreads to retain clients. In developed countries, this process has unfolded over decades, leading to current margins of one to two percent. Russia is still 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 exhibiting stable or rising NIM amid intensifying competition either possesses a unique franchise or harbours hidden portfolio 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 (CoR) measures the proportion of revenue that a bank must allocate to reserves for credit losses and serves as a critical indicator of underwriting quality. The formula yields net reserves created during a 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 higher than three percent indicates either an aggressive lending policy with excessive risks in the pursuit of volume or a sudden deterioration in the quality of the existing portfolio due to economic downturns or industry crises.
The Impact of CoR on Profitability
CoR directly influences profitability through simple but stringent income and expense arithmetic. If NIM is five percent and operational expenses are three percent of assets (Cost-to-Income at sixty percent), along with CoR at one percent, the operating profit before tax is one percent of assets, which, with a capital multiplier of ten, yields ROE of ten percent before tax or seven to eight percent afterwards. Should CoR rise to two percent, operating profit falls to zero; at three percent, the bank incurs an operational loss. Thus, even minor changes in the cost of risk of fifty to one hundred basis points can dramatically alter the investment case and fair valuation.
Dynamics as an Indicator of Problems
The dynamics of CoR serve as an early indicator of problems, often leading official NPL metrics by two to three quarters. A rising trend for two to three consecutive quarters with stable or even falling NPLs signals that the bank is finally acknowledging hidden portfolio issues by increasing provisions for Stage 2 loans, which have not yet defaulted but are clearly trending that way. A declining CoR alongside increasing NPLs is a contrary red flag, indicating manipulations with reserves: the bank artificially underestimates provisioning to demonstrate profit ahead of the IPO, deferring problems to future shareholders. A healthy pattern is a steady CoR around one hundred and fifty basis points with minor cyclical fluctuations of plus or minus thirty points around the trend.
Segmentation of CoR by Portfolios
Comparing CoR across portfolio segments uncovers risk profiles and pricing quality within each business area. Unsecured retail loans (credit cards, payday loans) typically record CoRs of three to five percent, compensated by high interest rates of fifteen to twenty-five percent and rapid portfolio turnover. Mortgages show CoRs of zero point five to one point zero percent due to property collateral and rigorous creditworthiness underwriting. Car loans track around one and a half to two percent. Corporate lending varies from one to three percent depending on the size and quality of borrowers: large reputable corporations may present a one percent CoR, while small and medium businesses range from two to three percent. A bank displaying an unusually low CoR in high-risk segments either possesses exceptional expertise in scoring and collections or is under-reserving losses, creating a ticking time bomb.
P/B Multiplier: Premium to Book Value
Basics of P/B Calculation
Price-to-Book (P/B), the ratio of market capitalisation to the book value of equity under IFRS, serves as a cornerstone for banking valuation and a primary benchmark for fair IPO pricing. The book value per share—calculated as total equity divided by the number of shares—indicates how much net assets correspond to the share, as well as its liquidation value in the event of hypothetical bankruptcy. Russian banks trade with P/B ratios ranging from 0.5 to 1.5 based on quality and prospects, sharply contrasting with multipliers of three to five in technology companies or two to three in consumer brands.
Reasons for Discounting Book Value
The cause of a chronic discount to book value lies in investor distrust regarding asset quality and profit stability in a cyclical business. Book value relies on the accounting assessment of loans less provisions, but the true market value of a portfolio may be significantly lower due to inadequate provisioning, unexpected macroeconomic downturns, or the realisation of concentration risks. A P/B ratio below one indicates that the market perceives that in the event of hypothetical liquidation of the bank and sale of the portfolio to other lending institutions, shareholders would receive less than the book value because buyers would demand a discount for risks and integration costs.
Residual Income Model
The relationship between P/B and ROE is mathematically substantiated through the residual income model proposed in the 1970s for evaluating financial institutions. A fair P/B equals one plus (ROE minus the cost of capital) divided by (cost of capital minus the growth rate). If a bank consistently earns an ROE of twenty percent, with the cost of equity (the return required by investors) at twelve percent and a stable long-term growth rate of five percent, the fair P/B would be 1 + (20%-12%)/(12%-5%) = 2.14. Any deviation of market valuations from this theoretical value is explained by perceived risks: the market discounts future ROEs 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 excludes intangible assets such as goodwill from past acquisitions, capitalised trademarks, and deferred tax assets of questionable realisability. For most Russian banks, the difference between book value and tangible book value is minimal, around five to ten percent; however, significant goodwill can accumulate in the balance sheet following major M&A deals, artificially inflating book value by twenty to thirty percent. The P/TBV ratio provides a more conservative estimate, excluding assets of questionable liquidation value and focusing on the "hard" components of capital.
Operational Efficiency and Cost Control
Cost-to-Income as an Efficiency Indicator
The cost-to-income ratio, the ratio of operating expenses to operating income, serves as an indicator of operational efficiency and the bank's ability to compete in a pricing war. Leading digital banks demonstrate a ratio of thirty to forty percent, implying that for every rouble of income, forty kopecks are spent on salaries, rent, IT, marketing, with the remaining sixty covering credit losses and generating profit. Traditional banks with extensive branch networks typically range from fifty to seventy percent, spending enormous resources on maintaining physical infrastructure and oversized staff.
The Impact of Efficiency on Competitiveness
For every percentage point difference in the cost-to-income ratio, there is a resulting competitive advantage: with equal NIMs of five percent, a bank with forty percent costs has an operating profit of three percent of assets, while one with sixty percent costs has only two percent, representing a difference of one and a half times. This advantage can be leveraged for aggressive pricing (lower loan rates, higher deposit rates), investments in technology, or higher dividend payouts. Banks with cost-to-income ratios above seventy percent are bound for extinction amid digital transformation unless they undertake radical optimisation.
Structure of Operational Expenses
The structure of operational expenses reveals management priorities and optimisation potential. Personnel costs typically account for forty to fifty percent of operational expenditures, depreciation and rent range from twenty to thirty percent, with IT and marketing at ten to twenty, and others at ten. Banks that heavily invest in technology (with IT costs constituting twenty to thirty percent) are laying a foundation for the future, automating processes and creating digital products. Banks with inflated management costs at sixty percent and low IT expenses of five to ten percent are living in the past and risk being ousted by more efficient competitors.
Comprehensive Evaluation Practices
Capital Evaluation Checklist
Synthesising all considered metrics into a cohesive picture demands a systematic approach and a sequential review of the checklist. Start with capital: an N1 ratio minimum of twelve percent, Tier 1 constituting no less than eighty percent of total capital, and a dividend policy allowing for a payout of no more than sixty to seventy percent of profits. Calculate the growth horizon without additional equity issues: (capital buffer in percentage points) / (asset growth rate × risk ratio). If the result is less than three years, there is a high risk of dilution.
Profitability and Asset Quality Analysis
Examine the stability of ROE five years prior, construct a decomposition using the DuPont model, and distinguish operating profit from one-off effects, such as asset sales, portfolio revaluations, and reversals of reserves. A normalised ROE should fall within the range of fifteen to twenty-five percent with year-on-year volatility of no more than three to five percentage points. Compare ROE with P/B: at an ROE of twenty percent, the fair P/B would be around two, and a discount of over thirty percent necessitates investigating hidden problems.
Assess asset quality comprehensively: NPLs at three to seven percent, coverage ratio between seventy to one hundred percent, CoR at one hundred to two hundred basis points, and migration to Stage 2 not exceeding two to three percentage points per quarter. Verify 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 excess is a red flag.
Margin and Efficiency Assessment
Interest margin and income structure: NIM between four and seven percent has been stable for the last two years; the share of interest income should be sixty to eighty percent, with fees between twenty and forty percent. Review the gap report for interest risk: the difference between assets and liabilities revaluated over a year should not exceed twenty percent of capital. Cost-to-Income below sixty percent with an increasing share of IT expenses are positive signals for competitiveness.
Peer Group Comparative Analysis
The final step is constructing a peer comparison table of five to seven peers based on size and business model. Compare P/B, ROE, NPL, CoR, NIM, and Cost-to-Income. If the evaluated bank trades at a premium to the median with average or worse operational metrics, it is clearly overvalued. A discount with superior metrics presents a potential opportunity, but be sure to ascertain the reason for the undervaluation: perhaps the market is aware of impending problems not evident in the latest reporting.
Macroeconomic Context and Timing
Finally, never lose sight of the macroeconomic context and timing. Bank IPOs amid key interest rates of sixteen to twenty percent compete with risk-free OFZs that yield similar returns without capital loss risk. The ideal window for listings is a stable or declining rate of seven to ten percent, increasing credit, low market volatility, and the absence of geopolitical shocks. Poor timing can doom even a quality bank, as evidenced by VTB's experience in 2007, which launched at the absolute peak of the market just three months before the collapse.
