A ticket to growth. Recommendation: BUY Target NOK 48 (44) Bank Norwegian Investor presentation

Transcription

1 COMPETITORS A ticket to growth Bank Norwegian Investor presentation Recommendation: BUY Target NOK 48 (44) 18-Aug-2015 Prepared by Analysts: Ulrik Årdal Zürcher, Fondsfinans AS, tel: , uaz@fondsfinans.no 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 20 of this report for Important Disclosure Information. 1

2 A ticket to growth INVESTMENT CASE Bank Norwegian is the Nordic champion of consumer finance, with unprecedented growth and profitability. The 2Q15 report reinforced and strengthened our confidence in the bank s ability to conquer the Nordic consumer loan market. We rate the stock BUY with a NOK 48 (44) target Steamrolled the competition in Norway and Sweden - FX adjusted growth of 16.9% in Sweden gives comfort on the bank s ability to grow abroad - By far largest growth (absolute numbers) of niche banks in the Norwegian market - The most profitable niche bank with an annualized RoE of 39% In an excellent position to thrive in the highly profitable, yet increasingly crowded, sector - FINTECH approach: massive economies of scale benefits combined with cost control - Highest RoE among Nordic banks provide capacity to continue the aggressive growth strategy - The bank s size and profitability enables it to buy market shares if needed Attractive valuation - Fair value of NOK 48 - Should trade at NOK 48 to avoid multiple decompression the next 12 months - Sustainable RoE of 20% supports a PB of 5.0 and PE of 16 (15E) 2

3 Results came in slightly under expectations, however... DEVIATION TABLE Deviation table BANK - REPORTED VERSUS EXPECTED FIGURES Key figures (NOKm) Actual FF est. Dev. FF Net interest income % Other income % Total revenues % Total OPEX % Pre-provision profit (PPP) % Loan losses % Pre-tax profit (PTP) % Tax expense % Net profit % EPS % Sources: Fondsfinans Research Weaker than expected «other income» - One-off added to commission expenses (roughly +NOK 3m) - NOK 1m higher-than-expected losses on financials High marketing expenses - NOK 93.5m vs. NOK 86.2m expected - Extra marketing efforts resulted in added growth (8.8% vs. 6.7% expected) Loan losses disappointed - 1.7% of gross loans vs. 1.6% expected - We pencil in higher losses going forward 3

4 ... very impressive compared to the competition LEAVING THE COMPETITION BEHIND QoQ net lending growth (NOKm*) 2Q15 annualized return on equity Bank Norwegian 515 Bank Norwegian 39 % Komplett bank 265 Ya Bank 239 Ya Bank 33 % Nordax 92 Nordax 22 % Nordax Bank Norwegian -28 Buying visibility online - Best at reaching spontaneous consumers - Santander and Oppfinans only real challengers (large balance sheets) * Currency adjusted for direct comparison 344 Komplett bank 1 % Highest RoE in the business - Size and capacity to outspend competition - We raise the long-term outlook Sources: Fondsfinans Research, company reports 4

5 Steamrolling the competition calls for higher growth curves NEW GROWTH FORECASTS Net lending growth Norway (LHS %, RHS NOKm) Net lending growth Sweden (LHS %, RHS NOKm) 7% 20,000 35% 14,000 7% 18,000 30% 12,000 6% 16,000 6% 14,000 25% 10,000 5% 12,000 20% 8, 000 5% 10,000 4% 8, % 6, 000 4% 6, % 4, 000 3% 4, 000 5% 3% 2, 000 2% 0 0% We keep the convexity of the growth curves - Upside potential in Sweden, especially if the NOK keeps depreciating against the SEK - Unchanged estimates in Denmark and Finland, yet we move entry from 2Q16 to 1Q16* Sources: Fondsfinans Research * 2Q report confirmed entry in 1Q16 2,

6 Long-term outlook considerably improved CHANGES TO ESTIMATES Estimate changes Curr. Prev. Curr. Prev. Curr. Prev. Change (%) NOKm 2015E 2015E 2016E 2016E 2017E 2017E 2015E 2016E 2017E Net interest incom e 1,397 1,369 1,891 1,712 2,347 2, % 10.5 % 12.6 % Non-interest income % 4.5 % 38.3 % Total revenues 1,497 1,473 2,031 1,846 2,533 2, % 10.0 % 12.3 % OPEX , % 9.4 % 7.3 % Pre-provision profit ,231 1,115 1,523 1, % 10.4 % 15.8 % Loan losses % 50.0 % 31.4 % Pre-tax profit (PTP) , % 0.0 % 10.9 % Tax expense % 0.0 % 10.8 % Net profit % 0.0 % 10.9 % EPS % -0.1 % 10.6 % Bank Norwegian is benefitting from lower funding costs, yet 2016 will be a challenging year - Deteriorating macro in Norway, albeit possibility to withstand larger losses than competition - Entry into Denmark and Finland (and corresponding entry loan loss rates) - We still assume the development in Denmark and Finland will mimic Sweden (adjusted for market size) 2Q15 report was showcase for Bank Norwegian s competitive advantages - Outpacing competition in terms of growth and profitability (destroying Nordax in its home market Sweden) - Costs excl. marketing controlled with an iron fist - Norwegian Airlines keep gaining market shares, which propagates the use of the reward card 6

7 We raise the target price to NOK 48 VALUATION Valuation models Sensitivity analysis on pricing: Average of models Terminal ROE Cost of equity 10 % 15 % 20 % 25 % 30 % 8 % % % % % Dividend discount model PV dividends 8,348 Value per share 48 Variables Terminal grow th 3.0 % Excess Return Valuation BV t=0 1,389 Risk free 2.0 % PV excess return 2,419 Beta 1.3 PV terminal 4,194 Risk premium 6.0 % Value of equity 8,002 Equity Cost 9.8 % Value per share 46 Stable ROE 20.0 % Exit P/B multiple model # shares (mill) 173 Fair stable P/B 2.5 PV div. pri-stable 1,358 PV Book (20E) 2,796 Value per share 48 Target price NOK 48 (44) - Peer group valuation NOK 49 - DCF/PB model NOK 48 Conservative terminal RoE 20% - RoE average peers 25% - Industry relatively protected at the moment -...but competitive situation from 2016 onwards heralds caution Beta in the top range of peer group - Company is in growth phase - Soft landing predicted in Norway, yet still some uncertainty 7

8 Share price should go to NOK ~48/49 within 12 months VALUATION Peer group valuation consensus* PB (curr.) We are satisfied with the current multiple - No multiple decompression (12 months) implies PV target of NOK 49 - On regression line implies target NOK 65 - Macro risk does not justify multiple expansion ROE (Avg. 15E & 16E) Bank Norwegian Ya Bank European Peers US Peers * No BANK NS RoE estimates on Bloomberg we use our own BANK NS should not trade at large discount - Strong growth / economies of scale benefits - Attractive markets (The Nordics) - Increasingly diversified country exposure 8

9 Bank Norwegian BANK NORWEGIAN Appendix 9

10 We raise loan loss estimates going forward LOAN LOSSES AND MARKETING EXPENSES Current estimates (August) NOK % 2.2 % 2.0 % Macroeconomic uncertainty in Norway Slightly disappointing loan losses in 2Q E 2016E 2017E 2018E 2019E 2020E New loans per NOK marketing exp. (LHS)* Loan losses (RHS) 1.8 % 1.6 % 1.4 % 1.2 % Marketing estimates per customer maintained - Per loan we penciled in increase from 3Q - Materialized one quarter ahead - Increased growth raises overall marketing exp. Initiation estimates (June) NOK E 2016E 2017E 2018E 2019E 2020E New loans per NOK marketing exp. (LHS)* Loan losses (RHS) * Included churn 1.9 % 1.8 % 1.7 % 1.6 % 1.5 % 1.4 % 1.3 % 1.2 % 10

11 Higher correlation between losses and unemployment in the US MACRO UNSECURED CONSUMER LENDING AND LOAN LOSSES Norway United States of America 10 % 9 % 8 % 7 % 6 % 5 % 4 % 3 % 2 % 1 % 0 % 10 % 9 % 8 % 7 % 6 % 5 % 4 % 3 % 2 % 1 % 0 % Loan losses (consumer loans) Unemployment Loan losses (consumer loans) Correlation 20% Correlation 73% Peaked at 7% 2Q10 Sources: Fondsfinans Research, Finanstilsynet, FED Unemployment 11

12 Consumers are remarkably price insensitive... MARKET DYNAMICS INSTALLMENT LOANS Spontaneous idea Wants immediate gratification Convenience > Price * Google consumer loan searches: Need funding Goes online Searches internet to find loan provider 55 % 45 % Consumer loan on the day Other Homogenous product offering - Should entail price competition, but price insensitive consumer - Credit providers have not been aggressive on price - Marketing is key competition element Marketing aggressiveness is increasing - Alfa-omega to be there when consumers get spontaneous spending ideas - The most expensive Cost-per-Clicks (Google) are usually connected to consumer loans - Using 3 rd party loan distributors can increase volume, but is more expensive and entails longer time-to-loan Sources: Fondsfinans Research, Google, industry insiders * I.e. Google's most searched for term involving consumer loans ( forbrukslån ) is consumer loan on the day (forbrukslån på dagen ), not e.g. cheapest/best loan 12

13 Offering air miles sets you apart from the competition CREDIT CARDS Choice of Issuer (Norway) Air miles issuers Effective interest The Norwegian Card 23.10% Bank Norwegian SAS Eurobonus Expected The Norwegian Card (Premium and/or Platinum) Shell MasterCard Statoil MasterCard Esso MasterCard SAS Eurobonus Classic 26.80% Offering air miles sets you apart in an otherwise crowded market Source: Fondsfinans Research SAS Eurobonus Premium SAS Eurobonus Platinum 23.07% 23.00% We expect Norwegian to launch premium/platinum cards to counter the interchange regulation (see dedicated slide) This would entail that non-premium holders subsidize premium holders while potentially increasing use/loyalty trying to obtain a higher status 13

14 Board before next takeoff to destination Growth COMPETITIVE ADVANTAGE Exogenous market growth Growth Sustainable competitive advantage - Proven management (see market slide) Capacity to be aggressive Recognizable Brand - Brand - Marketing capacity High ROE NAS Further growth ahead... High yields Cost control - Expected gross loan CAGR 24% (22%) Search trends Google* Bank Norwegian Nordax Ya Bank Komplett Bank Sources: Fondsfinans Research, Google * Popularity of search words relative to most searched word (BANK NS)... in attractive countries - Macro trends - Creditor protection - Welfare societies 14

15 A ticket to growth KEY FIGURES Key figures Key figures (NOKm) E 2016E 2017E 2Q15 3Q15E Net interest income (NII) Other op.revenues Total operating revenues 699 1,039 1,497 2,031 2, Operating costs Pre-provision profit (PPP) ,231 1, Loan losses Pre-tax profit (PTP) Taxes Net profit EPS BPS DPS Net interest margin 8.5 % 8.9 % 9.5 % 10.2 % 10.3 % 9.5 % 9.8 % Loan losses (%) 1.5 % 1.8 % 1.8 % 2.3 % 2.1 % 1.7 % 1.8 % Core equity capital ratio (CET 12.8 % 12.7 % 13.5 % 13.1 % 12.5 % Yield 0.0 % 0.0 % 0.0 % 0.0 % 0.0 % P/E n.a P/B n.a ROE 35.6 % 35.8 % 37.0 % 33.5 % 33.9 % Excellent position for further growth - Highest RoE in the sector - FINTECH approach - Proven management Dividend from end of No specific guidance from management - High RoE supports dividend - Greater than expected growth might curtail dividends Falling RoE due to increased competition - Stabilizes at ~30% (2020E) - Terminal valuation RoE 20% (2020 onwards) - Current peer average 25% 15

16 Income statement ESTIMATES INCOME STATEMENT (NOKm) E 2016E 2017E 2018E 2019E 2020E Interest income ,280 1,694 2,221 2,798 3,364 4,014 4,641 Interest expense ,028 Net interest income ,397 1,891 2,347 2,743 3,179 3,614 Commission and bank service income Commission and bank service expenses Net commission income Net financials & other income Total income ,039 1,497 2,031 2,533 2,974 3,459 3,942 Personnel expenses Marketing ,038 1,080 IT Other Total operating costs ,010 1,209 1,434 1,521 Provision for loan losses Profit on ordinary activities before taxes ,108 1,288 1,446 1,747 Tax charge Profit on ordinary activities after tax ,056 1,275 16

17 Balance sheet ESTIMATES BALANCE SHEET (NOKm) E 2016E 2017E 2018E 2019E 2020E ASSETS Liquid Assets 2,018 1,854 3,813 3,452 4,074 3,899 4,353 4,734 3,637 Gross Loans 4,622 6,611 9,597 12,745 17,168 21,483 26,312 31,625 35,936 Individual w rite dow ns Write dow ns on group of loans ,079 1,546 2,116 2,782 Net Loans to Customers 4,457 6,364 9,401 12,353 16,427 20,326 24,679 29,413 33,050 Other intangible assets Deferred tax assets Fixed assets Receivables and accrued income Shares and other securities Total Assets 6,570 8,349 13,425 16,072 20,846 24,646 29,533 34,735 37,340 LIABILITES Deposits from customers 5,627 6,592 10,156 11,987 16,070 18,426 22,204 26,370 29,396 Debt securities issued ,602 1,587 1,558 2,183 2,343 2, Other Liabilities ,071 1,363 1,627 Subordinated loans Total Liabilities 6,023 7,558 12,283 14,406 18,665 22,051 26,364 30,936 32,908 EQUITY Equity capital Retained earnings and other reserves ,343 1,858 2,262 2,827 3,408 4,109 Total Equity ,142 1,667 2,182 2,595 3,169 3,799 4,433 17

18 We rate Bank Norwegian HIGH risk RISK ASSESSMENT Sensitive to crisis - Churn: must renew loans every four years plus absolute growth - Higher loan losses than traditional banks especially during crisis Regulatory risks - Left alone until now due to lack of systemic risk in the sector - If regulation is changed we may see marketing limitations and additional capital requirements Loss of key personnel 18

19 Share information Share data Shareholders Share data Sector Consumer Finance Bloomberg BANK NS Risk rating HIGH Outstanding shares (million) 173 Market cap (NOK billion) 6.7 Total assets (NOK billion) 14.5 Net lending (NOK billion) 11.0 Free float 80 % Average volume (1000s last 12m) High/low 52w 28/44/93 Rel. Perf 3/6/12 37/44/89 Abs. Perf. 3/6/12 28/44/93 Major shareholders as of Norwegian Air Shuttle 20.0 % 34.6 Goldman Sachs & Co 8.7 % 15.0 Laugan 7.4 % 12.9 Borak 5.0 % 8.6 Societe Generale 4.6 % 8.0 Stenshagen Invest 4.3 % 7.4 MP Pensjon PK 3.9 % 6.8 Spencer Trading 3.5 % 6.0 Protector Forsikring 2.6 % 4.5 Sneisungen 2.2 % 3.7 Handelsbanken Norge 2.1 % 3.7 Torstein Tvenge 2.0 % 3.5 Total number of shares (mill) 66.3 %

20 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 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 Bank Norwegian ASA: 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): 0, corresponding to 0% of the company share capital Fondsfinans may hold shares in Bank Norwegian ASA 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 Bank Norwegian ASA. Fondsfinans has not acted as corporate adviser, lead manager in IPO etc. during the past 12 months. 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