When the going get tough...

Transcription

1 When the going get tough... Fondsfinans Research Sparebank 1 SR Bank 2Q15 Update Recommendation: BUY Target NOK August 2015 Prepared by Analyst: Geir Kristiansen, Fondsfinans AS, tel: , [email protected] This report was prepared by an analyst engaged by Fondsfinans AS, the Norwegian affiliate of Fondsfinans Inc., who is not registered as a research analyst with FINRA or subject to FINRA rules governing research. This report is not a product of Fondsfinans Inc. See page 12 of this report for Important Disclosure Information. 1

2 Continues to deliver 2Q15 UPDATE SR-Bank continues to deliver strong profitability despite low oil price. We make small changes in estimates and keep our NOK 62 target price. We are convinced that the current share price will prove to be an excellent entry point in a long-term perspective. Core revenues in line - In sum, NII and net commissions were in line with estimates - Basis swaps (covered bond company) a drag on net financials - Loan losses at low levels resilient to oil price in a month perspective We make small changes in estimates - Lower transferred volumes give higher NII and lower net commissions - Marginally higher costs Fee generating business have higher C/I - Lower losses, particularly in 2015E. We expect losses to peak in 4Q16 at 0.5% An unlikely worst-case loan loss scenario might be 3.5% of loans in a single year - Our valuation would fall to NOK 52 per share, given unchanged discount rate and long-term RoE and assuming no equity injection. A NOK 2bn share issue at NOK 40 per share would reduce fair value to NOK 50 - Equal to 22% of commercial real estate loan portfolio or 85% of real estate exposure in the Stavanger region or 100% of the real estate portfolio rented to oil companies 2

3 Lower estimates ESTIMATES 2Q15 estimates Key figures (NOKm) Actual FF est. Cons. Dev. FF Dev. 1Q15 2Q15 2Q15 cons. Net interest income % 0.8 % Net commissions % -5.7 % Other op.revenues % % Total revenues 1,132 1,179 1, % -7.0 % Total OPEX % 3.3 % Pre-provision profit (PPP) % % Loan losses % % Pre-tax profit (PTP) % -7.4 % Net profit % -6.7 % EPS % -7.1 % Changes in full-year estimates Estimate changes Curr. Prev. Curr. Prev. Change (%) NOKm 2015E 2015E 2016E 2016E 2015E 2016E Net interest income 2,553 2,514 2,621 2, % 3.0 % Non-interest income 2,330 2,421 2,353 2, % -3.0 % Total revenues 4,883 4,935 4,975 4, % 0.1 % OPEX -2,157-2,117-2,222-2, % 2.7 % Pre-provision profit 2,725 2,818 2,752 2, % -1.9 % Loan losses % -4.1 % Pre-tax profit (PTP) 2,450 2,418 2,099 2, % -1.2 % Tax expense % 2.9 % Net profit 1,918 1,910 1,639 1, % -2.3 % EPS (NOK) % -2.9 % Dividend (BOK) % -1.4 % Sum of NII and net commissions in line - Distribution varies with transferred volumes Weak other income - Losses on basis swaps in Boligkreditt Higher operating costs - Higher underlying growth than target - Acquisitions Low loan losses - Reversal of collective impairments NOK 10m Source: SR Bank, Inquiry Financial, Fondsfinans research Lower transferred volumes - Higher NII, lower net commissions Marginally higher costs Lower losses, particularly in 2015E - Still strong credit quality 3

4 Moderate lending growth LENDING Customer lending (NOKm) and growth NOKb % 4.3 % 2.8 % 5.9 % 5.4 % 7.6 % 7.8 % 5.4 % 2.9 % 1.6 % 1.2 % 1.8 % 3.0 % 3.3 % % 9% 8% 7% 6% 5% 4% 3% 2% 1% 7.8% growth YoY in 2Q15E, including transferred volumes - Expected 6% growth - Retail +4.7% - Corporate +13.8% (11.3% ex. curr.) 155 Gross lending to customers Growth YoY 0% Transferred volumes down NOK 2.9bn. - NOK 31.5bn, 27% of total lending We expect 2% lending growth in 2016 Source: SR Bank, Fondsfinans research 4

5 SPAREBANK 1 SR-BANK - 2Q15 UPDATE We expect net interest margin to bottom out in 3Q15 NII Net interest income and margin NOKm % 1.47% 1.51% 1.49% 1.45% 1.41% 1.42% 1.36% 1.36% 1.36% 1.41% 1.43% 1.43% % 1.60% 1.40% 1.20% 1.00% 0.80% 0.60% NIM -4 bps in 2Q15 QoQ Lower lending margins (QoQ) - Retail: 1.64% (-0.31%) - Corporate: 2.58% (-0.08%) 0 NII NIM 0.40% Higher deposit margins - Retail: -0.25% (+0.30%) - Corporate: -0.38% (+0.08%) Deposit to loan ratio: 60% (59%) Source: SR-Bank, Fondsfinans research 5

6 Cost/Income stabilizing around 45% OPERATING COSTS Cost/Income NOKm % 47.3 % 45.1 % 42.5 % 47.3 % 45.9 % 45.3 % 44.9 % 43.6 % 44.1 % 43.5 % 43.5 % 43.6 % % 50% 48% 46% 44% 42% 40% 38% 36% 34% 32% 30% Cost growth guidance - 0-2% annually - Our estimate: 2.5% growth ex. one-offs - Higher than guidance due to acquisitions and cost inflation OPEX C/I Source: SR Bank,, Fondsfinans research 6

7 Loan losses are still at low levels LOAN LOSSES Nominal and relative loan losses NOKm % 0.60% 0.50% 0.40% Non-performing and other problem loans down from 0.66% to 0.64% of loans in 2Q % 0.20% 0.10% Lay-offs in the oil industry will probably lead to higher losses going forward 0.0 LLP LLP in % of AGL (ann.) 0.00% Total exposure to oil operations is 8.9% of EAD Probability of default 2.1% Resilient to low oil price in a month perspective Source: SR Bank, Fondsfinans research 7

8 From premium valuation to discount vs regional peers VALUATION Key figures Key figures (NOKm) E 2016E 2017E 2Q15 3Q15E Net interest income (NII) 2,119 2,404 2,553 2,621 2, Other op.revenues 2,348 2,510 2,330 2,353 2, Total operating revenues 4,467 4,914 4,883 4,975 5,267 1,132 1,239 Operating costs -2,019-2,056-2,157-2,222-2, Pre-provision profit (PPP) 2,448 2,858 2,725 2,752 2, Loan losses Pre-tax profit (PTP) 2,316 2,601 2,450 2,099 2, Taxes Net profit 1,829 2,095 1,918 1,639 1, EPEC BPS DPS Net interest income 1.42% 1.45% 1.42% 1.40% 1.47% 1.43% 1.36% Loan losses (%) 0.11% 0.18% 0.18% 0.42% 0.33% 0.12% 0.14% Core equity capital ratio 11.1 % 11.5 % 12.6 % 13.7 % 14.0 % 12.3 % 12.4 % (CET Yield 1) 3.5 % 3.5 % 4.5 % 5.2 % 7.5 % P/E P/B ROE 13.7 % 14.2 % 11.8 % 9.4 % 10.2 % 10.8 % 12.4 % NOK 62 target implies P/B at 1.0x 2Q15 and P/E at 9.9x 2016E We expect falling profitability to reach bottom in RoE 9.2% Still room for increasing dividends - CET 1 14% in Flexibility to monitor capitalization Source: SR-Bank, Fondsfinans research 8

9 Full year and quarterly estimates ESTIMATES INCOME STATEMENT E 2016E 2017E 2Q15 3Q15E 4Q15E 1Q16E 2Q16E 3Q16E 4Q16E 1Q17E Net interest income 2,404 2,553 2,621 2, Net commission income 1,292 1,620 1,642 1, Other income Total core income 4,136 4,177 4,267 4,532 1,038 1,036 1,069 1,033 1,035 1,076 1,123 1,083 Total expenses -2,056-2,157-2,222-2, Pre-provision profit (core items) 2,080 2,020 2,045 2, Loan loss provision Pre-tax profit (core items) 1,823 1,744 1,392 1, Total financial income Pre-tax profit 2,601 2,450 2,099 2, Net profit (reported) 2,095 1,918 1,639 1, EPS (rep.) EPS (adj.) BALANCE SHEET E 2016E 2017E 2Q15 3Q15E 4Q15E 1Q16E 2Q16E 3Q16E 4Q16E 1Q17E Net lending to customers 140, , , , , , , , , , , ,469 Total assets 174, , , , , , , , , , , ,273 Total equity 15,403 16,989 18,053 19,310 15,998 16,502 16,989 17,395 17,218 17,632 18,053 18,474 Source: SR-Bank, Fondsfinans research 9

10 We rate SpareBank 1 SR Bank MEDIUM risk RISK ASSESSMENT High housing prices and high gross debt level to private individuals could trigger a substantial negative price reaction in the future SpareBank 1 SR-Banks has substantial direct and indirect exposure to the oil industry. Low oil prices is a significant risk factor in the medium and long term The bank has exposure to the financial markets. Higher volatility and increased risk premium and credit spreads could affect income and valuations negatively 10

11 Share information SRBANK Share data Share data Sector Banks Bloomberg SRBANK NO Equity Risk rating Low Outstanding shares (million) Market cap (NOK billion) 12.7 Total assets (NOK billion) Net lending (NOK billion) Free float 59% Average volume (1000s last 12m) High/low 52w 61.3/ 46.1 Weight PCC index 0.69% Rel. Perf 3/6/12-8/ -2/ -13 Abs. Perf. 3/6/12-13/ 0/ -10 Shareholders Major shareholders as of 03/07/2015 Sparebankstiftelsen SR-Bank 30.7 % 78,646 Gjensidige Forsikring 10.5 % 26,748 State Street Corp 6.8 % 17,278 Morgan Stanley 2.9 % 7,357 Wimoh Invest As 2.8 % 7,120 Government Pension F 2.3 % 5,761 J.P. Morgan 2.0 % 5,129 Pear Tree Advisors I 1.8 % 4,718 Skagen As 1.1 % 2,940 SEB 1.0 % 2,603 Nordea Bank AB 1.0 % 2,565 Clipper AS 1.0 % 2,525 Total number of EC shares 63.9 % 255,800 Source: Bloomberg, Fondsfinans research 11

12 Definitions of ratings Buy Low risk: with a potential of min 5%. Medium risk: with a potential of min 10%. High risk: with a potential of min 20%. Neutral Low risk: -5% to +5%. Medium risk: -10% to +10%. High risk: -20% to +20%. Sell Low risk: min -5%. Medium risk: min -10%. High risk: min -20%. Risk ratings are based on price volatility, fundamental criteria and perceived risk. Ratings are: Low (L), Medium (M) and High (H). Target: Our valuation as of today. Time frame of target: Target is what we value the share as of today. Recommendation distribution as of : Companies in each recommendation category that have been investment banking clients over the past 12 months: Recommendation No Percent Recommendation No Percent Buy % Buy 2 5 % Neutral 9 14 % Neutral 1 11 % Sell % Sell 0 0 % Total % Total 3 Our intention is to issue UPDATE and update research on a quarterly basis. Our investment recommendation is elaborated in accordance with The Norwegian Securities Dealers Associations standards. This report has not been sent to the company for correction of any factual errors. Fondsfinans is organized with Chinese walls between the Corporate Department and the Research/Broking Department. In addition, Fondsfinans has internal instructions and guidelines for handling sensitive information. The analyst receives compensation that is impacted by overall firm profitability, including investment banking activities. Fondsfinans is under supervision of The Financial Supervisory Authority of Norway. The recommendation has not been changed from BUY. The previous recommendation was issued Ownership per in Sparebank 1 SR Bank: Analyst (including his/her closely related persons or companies): 0, corresponding to 0% of the company share capital Employees (including their respective closely related persons or companies): 0, corresponding to 0% of the company share capital Group Fondsfinans (including the holdings of its Chairman, his spouse and their closely related companies, Erik Must AS and its 100% controlled subsidiaries): , corresponding to 0% of the company share capital Fondsfinans may hold shares in Sparebank 1 SR Bank as a result of daily trading/market making. Information on such holdings is not given when of non-significant value. Fondsfinans does not act as market maker in Sparebank 1 SR Bank. Fondsfinans has not acted as corporate adviser, lead manager in IPO etc. during the past 12 months. 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