Prepared by Analyst: Geir Kristiansen, Fondsfinans AS, tel: ,

Transcription

1 No oil rigs in sight Fondsfinans Research Sparebank 1 SMN 2Q15 Preview Recommendation: BUY Target NOK July 2015 Prepared by Analyst: Geir Kristiansen, Fondsfinans AS, tel: , gk@fondsfinans.no 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 14 of this report for Important Disclosure Information. 1

2 Strong core profit expected 2Q15 PREVIEW REPORTING DATE 12 AUGUST We expect SpareBank 1 SMN to report a historical strong core profit (ex net financials). We make only small changes in estimates and keep our NOK 77 target price. Low oil price exposure, strong management and attractive valuation make MING one our preferred picks among ECCs. Strong core profit - Lower funding costs and 1.6% lending growth contribute to stronger NIM - Costs control and moderate loan losses - Net financials weaker due to bond market; pretax estimate down by NOK 64m to NOK 565m Low oil price exposure - Direct mainly offshore service vessels - 18% of corporate loans, 4.5% of total - Low indirect exposure, except in the north-west (Møre) Attractive valuation - Target price implies P/B 1.25x 2Q15E and P/E 9.4x 2015E - Dividend yield is 4.5%/6.4%/8.5% the coming three year period (current market price) - Management reiterates that payout ratio should be normalized ( 50%) the coming years 2

3 FONDSFINANS RESEARCH - NORWEGN FI NANCIALS Key takeaways from North-American road show June MING ROAD SHOW Lower income growth - Net interest margins still stable margin pressure likely in 2H15 - Lower lending growth due to higher capital requirement and lower demand - Retail +5%, corporate below 4% growth, down from 8%/13% last 12 months - 2-3% growth in non-interest income Focus on costs New distribution model - Zero cost growth in parent bank Man-year down from 700 to Branch network will be largely intact but with half the number of employees - Cost growth in daughter companies - more cost intensive/less capital intensive Dividends will be normalised - From 25-35% to 50%+ when fully capitalized - Higher capital requirement will not necessarily mean lower dividend - Sale of BNbank will increase CET 1 ratio by more than 1% - Higher lending rate/run-off of commercial real-estate portfolio is an option 3

4 We are not overly worried about interest margins ESTIMATES Quarterly estimates P&L 2Q14 1Q15 2Q15E Net interest income Net commission income Other income Total core income Total expenses Pre-provision profit (core items) Loan loss provision Pre-tax profit (core items) Total financial income Pre-tax profit Net profit Changes in estimates Estimate changes Curr. Prev. Curr. Prev. Change (%) NOKm 2015E 2015E 2016E 2016E 2015E 2016E Net interest income 1,897 1,908 1,930 1, % -0.1 % Non-interest income % 0.0 % Total revenues 4,013 4,077 4,113 4, % -0.1 % OPEX % 0.0 % Pre-provision profit 2,204 2,268 2,304 2, % -0.1 % Loan losses % 0.0 % Pre-tax profit 2,087 2,151 2,061 2, % -0.1 % Tax expense % -0.1 % Net profit 1,641 1,692 1,628 1, % -0.1 % EPEC (rep.) % -0.1 % Dividend % -0.1 % Source: Fondsfinans research EPEC (rep.) Net lending to customers 84,735 91,855 91,634 Consensus NOK 517m pretax (Bloomberg) We expect consensus to come down Low pressure on margins Weak bond market Strong contribution from associates Source: Company data, Fondsfinans research 4

5 Stronger than expected growth in corporate lending LENDING Customer lending (NOKm) and growth NOKb % % 10.2 % % % 8.0 % % 5.4 % 5.7 % 5.5 % 5.0 % 6.0 % % 2.0 % 1.7 % 2.0 % 2.0 % 4.0 % % % Gross lending to customers (incl. transf. Volume) Growth YoY We expect lower lending growth - 5.5% growth in retail lending (YoY) - 4.5% growth in corporate lending Low growth also coming years E: 2.4% E: 2.0% E: 4.6% Source: SMN, Fondsfinans research 5

6 Margins supported by lower lending rates and funding costs LENDING MARGINS Net interest income and margin NOKm % 1.56% 1.58% 1.52% 1.56% 1.54% % 1.46% 1.48% % 1.56% % 1.8 % 1.6 % 1.4 % Pressure on lending rates - Cutting deposit rates more % NII NIM 1.0 % 0.8 % 0.6 % 0.4 % Falling funding costs in the bond market - SMN has still mainly old, costly funding - This will be re-financed at lower rates Source: SMN, Fondsfinans research 6

7 Strong cost focus also in SMN OPERATING COSTS Cost/Income NOKm % 43.2 %42.8 % 50.5 % 43.6 %47.4 % 44.6 %44.8 % 45.6 % 44.5 %43.6 %42.3 % % 60% 50% 40% 30% Zero cost growth in parent bank Man-year down from 700 to OPEX C/I 20% 10% 0% Branch network will be largely intact - Half the number of employees Cost growth in daughter companies - More cost intensive/less capital intensive Source: SMN, Fondsfinans research 7

8 Low loan losses, confident management LOAN LOSSES Nominal and relative loan losses NOKm % 0.31% % 0.35% 0.30% Lower gross problem loans i 1Q % of loans (0.22% 4Q14) % 0.25% - Still trending down in the sector % 0.09% 0.07% 0.11% 0.15% 0.16% 0.14% 0.12% 0.10% 0.20% 0.20% 0.15% 0.10% 0.05% 0.00% Low exposure to high-risk sectors - Shipping and offshore: 6% - Construction, building: 4% - Commercial real estate: 14% LLP LLP in % of AGL Source: SMN, Fondsfinans research 8

9 Full year and quarterly estimates ESTIMATES P&L E 2016E 2017E 4Q14 1Q15 2Q15E 3Q15E 4Q15E 1Q16E 2Q16E 3Q16E 4Q16E Net interest income 1,790 1,897 1,930 2, Net commission income 1,168 1,167 1,220 1, Other income Total core income 3,302 3,427 3,513 3, Total expenses -1,789-1,809-1,809-1, Pre-provision profit (core items) 1,513 1,618 1,704 1, Loan loss provision Pre-tax profit (core items) 1,424 1,501 1,461 1, Total financial income Pre-tax profit 2,145 2,087 2,061 2, Net profit (recurring) 1,782 1,641 1,628 1, Net profit (reported) 1,752 1,641 1,628 1, EPEC (rep.) EPEC (adj.) BALANCE SHEET E 2016E 2017E 4Q14 1Q15 2Q15E 3Q15E 4Q15E 1Q16E 2Q16E 3Q16E 4Q16E Net lending to customers 89,872 93,783 96, ,913 89,872 91,855 91,634 93,277 93,783 96,065 93,860 95,920 96,405 Total assets 126, , , , , , , , , , , , ,706 Total equity 12,377 13,576 14,658 15,766 12,525 12,523 12,458 12,496 13,724 13,569 13,581 13,585 14,806 Source: SMN, Fondsfinans research 9

10 Key ratios ESTIMATES KEY FIGURES E 2016E 2017E 4Q14 1Q15 2Q15E 3Q15E 4Q15E 1Q16E 2Q16E 3Q16E 4Q16E ROE 14.97% 12.66% 11.53% 11.88% 12.20% 14.08% 12.09% 13.31% 12.51% 11.46% 11.88% 12.00% 12.03% ROE (core banking) 8.81% 8.15% 7.28% 7.79% 14.05% 11.88% 12.53% 12.16% 11.40% 10.38% 10.80% 10.91% 10.98% ROA 1.45% 1.30% 1.27% 1.35% 1.23% 1.43% 1.23% 1.32% 1.29% 1.23% 1.27% 1.27% 1.31% RORWA 1.84% 1.82% 1.77% 1.87% 1.57% 1.98% 1.71% 1.83% 1.80% 1.69% 1.80% 1.76% 1.84% RORWA (core banking) 1.14% 1.29% 1.33% 1.41% 1.85% 1.60% 1.75% 1.70% 1.66% 1.55% 1.61% 1.63% 1.70% C/I 44% 45% 44% 42% 50% 44% 47% 45% 45% 46% 45% 44% 42% C/I adj. 54% 53% 51% 49% 48% 47% 47% 46% 46% 47% 46% 45% 44% Costs in % of total assets 1.48% 1.43% 1.41% 1.37% 1.58% 1.45% 1.47% 1.44% 1.43% 1.42% 1.43% 1.41% 1.39% Loan loss ratio (gross loans) 0.10% 0.12% 0.25% 0.23% 0.15% 0.10% 0.12% 0.14% 0.16% 0.20% 0.24% 0.28% 0.31% Net interest margin (normalised) 1.48% 1.50% 1.50% 1.56% 1.58% 1.52% 1.56% 1.54% 1.48% 1.46% 1.48% 1.51% 1.56% Deposit-to-loan ratio Net Loans/Equity CET 1 ratio (transition rule) 11.2 % 12.7 % 13.5 % 14.3 % 11.2 % 12.3 % 12.6 % 12.4 % 12.7 % 13.2 % 13.6 % 13.3 % 13.5 % Tier 1 ratio (transition rule) 13.0 % 14.6 % 15.4 % 16.1 % 13.0 % 14.2 % 14.5 % 14.3 % 14.6 % 15.0 % 15.5 % 15.2 % 15.4 % Tier 2 ratio (transition rule) 15.2 % 17.3 % 18.0 % 18.6 % 15.2 % 16.5 % 17.3 % 17.0 % 17.3 % 17.7 % 18.2 % 17.9 % 18.0 % Source: SMN, Fondsfinans research 10

11 Double digit RoE calls for P/B > 1 SUMMARY Key figures (NOKm) E 2016E 2017E 1Q15 2Q15E Net interest income (NII) 1,616 1,790 1,897 1,930 2, Other op.revenues 1,965 2,233 2,116 2,183 2, Total operating revenues 3,581 4,023 4,013 4,113 4,354 1, Operating costs -1,722-1,789-1,809-1,809-1, Pre-provision profit (PPP) 1,859 2,234 2,204 2,304 2, Loan losses Pre-tax profit (PTP) 1,758 2,145 2,087 2,061 2, Taxes Net profit 1,370 1,782 1,641 1,628 1, EPEC BPS DPS Net interest income 1.45% 1.48% 1.50% 1.50% 1.56% 1.52% 1.56% Loan losses (%) 0.13% 0.10% 0.12% 0.25% 0.23% 0.10% 0.12% Core equity capital ratio (CET 1) 10.7 % 11.2 % 12.7 % 13.5 % 14.3 % 12.3 % 12.6 % Yield 3.8 % 4.2 % 4.5 % 6.4 % 8.4 % P/E P/B ROE 13.1 % 15.0 % 12.7 % 11.5 % 11.9 % 14.1 % 12.1 % NOK 77 price target implies P/B 1.25x 2Q15E and P/E 9.4x 2015E Strong core profit expected Low oil price exposure Attractive valuation Source: SMN, Fondsfinans research 11

12 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 Low oil prices is a 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 12

13 Share information MING Share data Share data Sector Banks Bloomberg MING NO Equity Risk rating Low Outstanding shares (million) Market cap (NOK billion) 8.4 Total assets (NOK billion) Net lending (NOK billion) 91.3 Free float 93% Average volume (1000s last 12m) High/low 52w 69.3/ 50.0 Weight PCC index 38.49% Rel. Perf 3/6/12 1/ 13/ 19 Abs. Perf. 3/6/12 1/ 25/ 26 Shareholders Major shareholders as of 09/05/2015 DNB Asset Management 3.7 % 4,799 Sparebankstiftelsen 3.1 % 3,965 Nordea Norge 3.0 % 3,873 Odnin Norge 2.9 % 3,719 Vind LV AS 2.1 % 2,736 Wimoh Invest 1.8 % 2,359 Bank of New York Mellon 1.8 % 2,350 Danske Invest Norske 1.6 % 2,121 Pareto Aksje Norge 1.6 % 2,071 MP Pension 1.6 % 2,058 Pareto AS 1.4 % 1,821 Total number of EC shares 24.5 % 129,836 Source: Bloomberg, Fondsfinans research 13

14 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 1 2 % Neutral % Neutral 1 10 % Sell % Sell 0 0 % Total % Total 2 Our intention is to issue preview and update research on a quarterly basis. Our investment recommendation is elaborated in accordance with The Norwegian Securities Dealers Associations standards. This report has 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. This recommendation has not been changed from BUY. The previous recommendation was issued Ownership per in Sparebank 1 Midt-Norge: 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 Midt-Norge as a result of daily trading or market making. Information on such holdings is not given when of non-significant value. Fondsfinans does not act as market maker in Sparebank 1 Midt-Norge. Fondsfinans has not acted as corporate adviser, lead manager in IPO etc. during the past 12 months. 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