Russian bank run hit 4Q profit

Transcription

1 Russian bank run hit 4Q profit Fondsfinans Research SpareBank 1 Nord-Norge 4Q14 Update Recommendation: BUY Target NOK 49 (54) 9 February 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. See page 13 of this report for Important Disclosure Information. 1

2 Mixed signals target reduced to NOK 49 (54) INVESTMENT CASE Increased uncertainty make us cut target price to NOK 49. Nord-Norge remains attractively valued with a current P/B of 0.87x and we still expect a double-digit RoE in our forecast horizon. Our Buy recommendation stands firm. Mixed results ex Russia - Weaker NII due to margin pressure - Strong contribution from insurance (SpareBank 1 Gruppen) - Loan losses in line Write-down in Russia in line with Profit Warning - NOK 300m in write-down in Russia - 49% of total exposure to Russia of NOK 615m - 100% of exposure to Tavrichesky Bank plus currency effect in North West Alliance Bank We cut target price to NOK 49 (54) - Higher risk premium; cost of equity 10% (9.5%) - Unchanged dividend forecasts - CET 1 ratio 11.5% expected Reported CET 1 probably too high in 3Q14 2

3 Stronger revenues, higher costs than expected 4Q14 REPORT Deviation table* Key figures (NOKm) Actual FF est. Cons. Dev. FF Net interest income % Other op.revenues % Total revenues % Total OPEX % Personnel expense % 300m in losses in Russia, see Weekly Banking 5/15, affected net financials, costs and loan losses Lower NII due to weaker deposit margin Pre-provision profit (PPP) % Loan losses % Pre-tax profit (PTP) % Tax expense % Bus. Held fr sale -27 Net profit % EPEC % DPS % *Estimated other revenues, costs and losses are adjusted for the bank s booking of losses in Russia Source: SpareBank 1 Nord-Norge Fondsfinans research, Bloomberg NOK 30m higher contribution from associated companies Higher operating costs due to writedown of repossessed assets NOK 37m in loan losses ex Russia, in line with expectations 3

4 Marginal changes in estimates ESTIMATES Changes in estimates Estimate changes Curr. Prev. Curr. Prev. Change (%) NOKm 2015E 2015E 2016E 2016E 2015E 2016E Net interest income 1,487 1,541 1,526 1, % -5.8 % Non-interest income % 4.0 % Total revenues 2,918 2,930 3,071 3, % -1.1 % OPEX % 1.2 % Pre-provision profit 1,649 1,676 1,783 1, % -2.8 % Loan losses % 1.3 % Pre-tax profit 1,469 1,493 1,536 1, % -3.4 % Tax expense % -3.4 % Net profit 1,175 1,194 1,229 1, % -3.4 % EPEC (rep.) % 0.0 % Dividend % 0.0 % Source: Fondsfinans research Lower net interest income - More cautious guidance - Funding costs more resilient Higher other operating income - Contribution from SpareBank 1 Gruppen Marginal increase in costs and loan losses 4

5 Lower growth in lending than expected LENDING Customer lending (NOKm) and growth NOKb % % 16.0 % % % 11.9 % 11.4 % 12.0 % % % 6.8 % 7.3 % 6.7 % 7.1 % 8.0 % % 5.9 % 5.7 % % % % % Gross lending to customers Growth YoY Growth (incl. transfered) YoY Source: SpareBank 1 Nord Norge, Fondsfinans research Stronger growth than peers - Total incl. transferred loans 5.5% - Retail 6.1% - Corporate 3.9% Robust growth in the region - GDP 3% in 2015, 4% in Norway 1%-point lower We expect moderate lending growth : 5.4% : 4.7% 5

6 NII and margins were lower than expected NII Net interest income and margin NOKm % 1.78 % 1.84 % 1.83 % 1.71 %1.72 % % 1.64 % 1.60 %1.59 % % 1.52 % NII NIM Source: SpareBank 1 Nord Norge, Fondsfinans research % 2.0 % 1.9 % 1.8 % 1.7 % 1.6 % 1.5 % 1.4 % 1.3 % 1.2 % 1.1 % 1.0 % Weaker deposit margin - Retail -.32% (-6 bps QoQ) - Corporate 0.01% (+2 bps) - Public sector -.75% (+9 bps) Improved lending margin - Retail 2.3% (+7 bps) - Corporate 2.92% (-3 bps) 6

7 Cost/Income stabilizing below 45% OPERATING COSTS Operating costs and Cost/Income NOKm % 62.5 % 48.9 % 54.7 % 51.7 % 49.4 % 53.2 % 46.6 % 42.1 % 42.7 % 44.2 % 38.8 % % 70% 60% 50% 40% 30% Higher cost level in 4Q14 - Russia NOK 14m - Write-downs NOK 25m - Higher bonuses NOK 8m OPEX Source: SpareBank 1 Nord Norge, Fondsfinans research C/I 20% 10% 0% SNN will target an annual growth in costs on 0-2% 7

8 Low loan losses, but higher than expected LOAN LOSSES Nominal and relative loan losses (ex Russia) NOKm % 0.33 % 0.05 % 0.87 % 0.5 % 0.24 %0.30 %0.35 % 0.35 % 0.4 % 0.29 % 0.25 % 0.26 % 0.3 % 0.17 % 0.15 % LLP LLP in % of AGL Source: SpareBank 1 Nord Norge, Fondsfinans research % 1.0 % 0.9 % 0.8 % 0.7 % 0.6 % 0.2 % 0.1 % 0.0 % Problem loans down - Gross problem loans 0.64% vs 0.8% in 3Q - Provisions ratio 108% - Collective impairments increased by NOK 30m Low exposure to high-risk sectors - Total exposure to shipping and offshore of 5% - Exposure to construction 3% - Low indirect exposure to oil price Limited remaining exposure to Russia - NOK 300m to 75% owned bank 8

9 Full year and quarterly estimates ESTIMATES INCOME STATEMENT E 2016E 3Q14 4Q14 1Q15E 2Q15E 3Q15E 4Q15E Net interest income 1,290 1,426 1,487 1, Net commission income Other income Total core income 2,212 2,392 2,464 2, Total expenses -1,207-1,328-1,269-1, Pre-provision profit (core items) 1,005 1,064 1,195 1, Loan loss provision Pre-tax profit (core items) ,015 1, Total financial income Pre-tax profit 1,179 1,345 1,469 1, Net profit (recurring) 964 1,095 1,175 1, EPEC (rep.) EPEC (adj.) BALANCE SHEET E 2016E 3Q14 4Q14 1Q15E 2Q15E 3Q15E 4Q15E Net lending to customers 56,918 60,842 64,785 68,592 59,897 60,842 63,139 64,026 64,953 64,785 Total assets 77,513 83,188 89,059 94,293 80,621 83,188 86,473 87,687 89,291 89,059 Total equity 8,500 9,373 9,719 10,180 9,335 9,343 9,163 9,478 9,756 9,689 Source: SpareBank 1 Nord Norge, Fondsfinans research 9

10 Well capitalized bank; will increase pay-out ratio SUMMARY Key figures (NOKm) E 2016E 3Q14 4Q14 Net interest income (NII) 1,166 1,290 1,426 1,487 1, Other op.revenues 916 1,268 1,568 1,430 1, Total operating revenues 2,082 2,558 2,994 2,918 3, Operating costs -1,120-1,207-1,328-1,269-1, Pre-provision profit (PPP) 962 1,351 1,666 1,649 1, Loan losses Pre-tax profit (PTP) 767 1,179 1,345 1,469 1, Taxes Net profit ,095 1,175 1, EPEC BPS DPS Net interest income 1.59 % 1.69 % 1.77 % 1.73 % 1.66 % 1.84 % 1.83 % Loan losses (%) 0.36 % 0.30 % 0.52 % 0.28 % 0.36 % 0.26 % 1.55 % Core equity capital ratio (CET 10.4 % 12.3 % 12.6 % 13.4 % 13.3 % 13.2 % 12.6 % Yield 1) 4.0 % 3.4 % 4.9 % 6.5 % 7.5 % P/E P/B ROE 8.9 % 12.5 % 12.3 % 12.3 % 12.4 % 13.4 % 1.5 % Source: Fondsfinans research Increased uncertainty make us cut target price to NOK 49 Nord-Norge remains attractively valued with a current P/B of 0.87x We still expect a doubledigit RoE in our forecast horizon 10

11 We rate SpareBank 1 Nord-Norge MEDIUM risk RISK ASSESSMENT High housing prices, particularly in regional centers, and high gross debt level to private individuals could trigger a substantial negative price reaction in the future SpareBank 1 Nord-Norge has exposure to rural regions in decline, where collateral in real estate may have uncertain value The bank has exposure to cyclical industries like fisheries, aquaculture and oil service 11

12 Share information SPAREBANK 1 NORD-NORGE Share data Share data Sector Banks Bloomberg NONG NO Equity Risk rating Low Outstanding shares (million) Market cap (NOK billion) 3.9 Total assets (NOK billion) 83.2 Net lending (NOK billion) 63.1 Free float 95 % Average volume (1000s last High/low 52w 40.7/ 32.9 Weight PCC index % Rel. Perf 3/6/12-7/ 10/ -8 Abs. Perf. 3/6/12-3/ 14/ 5 Source: Bloomberg, Fondsfinans research Shareholders Major shareholders as of Mp Pension 2.7 % 2,721 Dnb Asset Management 2.4 % 2,450 Fmr Llc 2.3 % 2,285 Pope Asset Managemen 2.1 % 2,083 Citibank Na 2.0 % 2,053 Wimoh Invest As 1.6 % 1,615 State Street Bank An 1.4 % 1,442 Sr Bank 1.4 % 1,412 Protector Forsikring 1.3 % 1,354 Pareto As 1.3 % 1,271 Arctic Funds Plc 1.2 % 1,227 Dnb Livsforsikring A 1.2 % 1,215 Total number of EC shares 21.0 % 100,398 12

13 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 6 % Neutral % Neutral 1 7 % Sell 1 2 % Sell 0 0 % Total % Total 3 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 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 Nord-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 0.0% of the company share capital Fondsfinans may hold shares in Sparebank 1 Nord-Norge as 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 Nord-Norge. Fondsfinans has not acted as corporate adviser, lead manager in IPO etc. during the past 12 months. 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