Resilient interest margins Fondsfinans Research – Sparebank 1 SMN 3Q14 Update
Recommendation: BUY – Target NOK 74 3 November 2014
Prepared by Analyst: Geir Kristiansen, Fondsfinans AS, tel: 23 11 30 11, e-mail:
[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. See page 15 of this report for Important Disclosure Information.
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Resilient interest margins INVESTMENT CASE
We are impressed by the net interest margins reported by the savings banks, and believe that cheaper funding will give resilience to lending margin pressure also going forward. We increase our target price for SMN to NOK 74 (70), which implies a P/B of 1.18x 2014E and a P/E of 9.4x 2015E.
Strong revenues -
Positive effect of lower deposit margins and funding costs – more to come We increase NII estimates for 2015/16 by 11%/13% Impressive contribution from associated companies (SpareBank 1 Gruppen)
SPAREBANK 1 SMN – 3Q14 UPDATE
Operating expenses under control -
Slightly below expectations in 3Q Restructuring charges in 4Q – We expect NOK 25m Zero growth target in mother company – We cut costs forecasts by 5%/6%
Low loan losses – confident management 2
Loan losses in line Management sees no need for increased group provisions – already at a high level Low exposure to high-risk sectors
Net margin surprised positively 3Q14 REPORT
Deviation table Key figures (NOKm ) Net interest incom e
Actual 463
FF est. 427
Other op.revenues
530
500
Total revenues
993
927
Total OPEX Personnel expense
425 235
435 240
-2.2 % -2.0 %
Pre-provision profit (PPP)
568
493
15.3 %
24
22
11.3 %
Pre-tax profit (PTP)
545
471
Tax expense
101
99
Net profit
443
372
370
19.1 %
EPS
2.21
1.85
1.94
19.3 %
SPAREBANK 1 SMN – 3Q14 UPDATE
Loan losses
Cons.
Dev. 8.4 % 6.0 %
951
498
7.1 %
15.7 % 2.1 %
Stronger than expected revenues - Strong margins - NOK 50m higher contribution from the SB 1Group - NOK 27m weaker net financials
Lower OPEX - Restructuring charges in 4Q14
Loan losses in line - Confident management
II Source: SMN, Bloomberg, Fondsfinans research
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We are not worried about interest margins ESTIMATES
Changes in estimates Estim ate changes
Curr.
Prev.
Curr.
Prev.
NOKm
2015E
2015E
2016E
2016E
2015E
2016E
Net interest incom e
1,958
1,765
2,046
1,806
10.9 %
13.3 %
Non-interest income
2000
2,136
2079
2,191
-6.4 %
-5.1 %
Total revenues
3,958
3,902
4,125
3,997
1.4 %
3.2 %
OPEX
-1757
-1845
-1796
-1919
-4.8 %
-6.4 %
Pre-provision profit
2,201
2,056
2,329
2,078
7.1 %
12.1 %
-180
-152
-294
-230
18.6 %
27.9 %
2,021
1,904
2,035
1,848
6.1 %
10.1 %
-424
-400
-427
-388
6.1 %
10.1 %
1,596
1,504
1,607
1,460
6.1 %
10.1 %
7.9
7.5
8.0
7.2
6.1 %
10.1 %
Loan losses
SPAREBANK 1 SMN – 3Q14 UPDATE
Pre-tax profit Tax expense Net profit EPEC (rep.)
Change (%)
Less pressure on margins (p 6) - Deposit rates down more than lending rates (so far) - Falling funding costs in the bond market
Lower contribution from net financials - Potential gain from sale of real estate project (Grilstad Marina) is not included
Lower opex (p 7) - Target 0 growth in mother bank
Higher loan losses (p 8) - Uncertain macroeconomic development
Source: SMN, Bloomberg, Fondsfinans research
4
Strong growth in retail lending (8% YoY) LENDING
Customer lending (NOKm) and growth NOKb 9.5 % 140 120
% 10.0 %
9.4 %
9.0 %
8.2 % 7.4 %
7.4 %
8.0 %
100 5.7 % 5.0 %
80
7.0 % 5.4 %
6.0 % 4.5 %
5.0 %
60
4.0 %
40
3.0 % 2.0 %
20
SPAREBANK 1 SMN – 3Q14 UPDATE
- 7.6% growth in retail lending in 3Q14 (YoY) - 2% growth in corporate lending
1.0 %
0
0.0 %
Gross lending to customers (incl. transf. Volume)
Source: SR Bank, , Fondsfinans research
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SMN is gaining market share in the region, despite strong competition from DNB.
Growth YoY
We assume a moderate 3.6% growth in lending in 2015/16, including transferred loans
Margins boosted by lower lending rates and funding costs LENDING MARGINS
Net interest income and margin NOKm 600
1.64 % 1.54 %
500 400
1.44 %
1.44 %
1.51 %
1.47 %
1.50 %
1.56 %
% 1.8 % 1.6 % 1.4 %
1.27 %
1.2 % 300
Deposit rates down more than lending rates (so far) - Retail lending margins down by 9 bps QoQ - Retail deposit margins up by13 bps.
1.0 % 200
0.8 %
100
0.6 %
0
0.4 %
NII
NIM
SPAREBANK 1 SMN – 3Q14 UPDATE
Customer margins
Falling funding costs in the bond market - EUR 500m loan in 2Q14 at lower rates - SMN has still mainly old, costly funding - This will be re-financed at lower rates - 17% in 4Q4 and 2015 - 16% in 2016
Source: SR Bank, , Fondsfinans research 6
Substantial reduction in long term funding costs
FONDSFINANS RESEARCH - NORWEGIAN FINANCIALS
LONG TERM FUNDING COST
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Strong cost focus also in SMN OPERATING COSTS
Cost/Income NOKm 57.0 %
% 60%
500 450 400
50.3 % 51.4 %
47.9 % 43.3 %
46.9 % 41.8 % 43.2 % 42.8 %
350
50%
40%
300 250
30%
40 employees have to go - We assume NOK 25m in charges in 4Q14 - Digitalization
200 20%
150 100
10%
50
SPAREBANK 1 SMN – 3Q14 UPDATE
0
0%
OPEX
C/I
Source: SR Bank, , Fondsfinans research 8
Target 0 growth in mother company - Subsidiaries are not measured on costs
Low loan losses, confident management LOAN LOSSES
Nominal and relative loan losses NOKm
%
35.0
0.18%
0.16 % 0.15 %
0.16%
30.0 0.13 % 25.0 20.0
0.11 % 0.09 %
0.11 %
0.09 %
0.12% 0.10%
0.09 % 0.07 %
15.0
0.14%
0.08% 0.06%
10.0
Gross problem loans in % of lending at 0.47%, as in 2Q - Provisions ratio 87% (140% of nonperforming loans) - “No need for increased group provisions”
0.04% 5.0
0.02%
SPAREBANK 1 SMN – 3Q14 UPDATE
0.0
0.00%
LLP
LLP in % of AGL
Source: SR Bank, Fondsfinans research 9
Low exposure to high-risk sectors - Total exposure to shipping and offshore of 4.8 - Exposure to construction 3.2%
Double digit RoE calls for P/B > 1 SUMMARY
Key figures (NOKm)
2012
2013
2014E
2015E
2016E
Net interest income (NII) Other op.revenues
1,477 1,590
1,616 1,965
1,793 2,244
1,958 2,000
2,046 2,079
431 596
463 530
Total operating revenues Operating costs
3,067 -1,653
3,581 -1,722
4,037 -1,761
3,958 -1,757
4,125 -1,796
1,027 -444
993 -425
Pre-provision profit (PPP) Loan losses
1,414 -58
1,859 -101
2,276 -83
2,201 -180
2,329 -294
583 -15
568 -23
Pre-tax profit (PTP) Taxes Net profit
1,356 -295 1,061
1,758 -388 1,370
2,193 -405 1,788
2,021 -424 1,596
2,035 -427 1,607
568 -106 462
545 -101 444
6.2 49.5
6.9 55.6
8.8 62.3
7.9 67.6
8.0 72.7
2.3 57.8
2.2 60.0
DPS Net interest income
1.5 1.41 %
1.7 1.45 %
2.6 1.53 %
3.2 1.62 %
4.0 1.63 %
1.50 %
1.56 %
Loan losses (%) Core equity capital ratio (CET 1)
0.08 % 10.0 %
0.13 % 10.7 %
0.09 % 11.9 %
0.20 % 12.6 %
0.31 % 13.4 %
0.07 % 11.1 %
0.11 % 11.5 %
Yield P/E P/B ROE
4.1 % 6.1 0.74 11.7 %
3.8 % 6.7 0.83 13.1 %
4.3 % 6.9 0.97 15.0 %
5.3 % 7.6 0.90 12.4 %
6.6 % 7.6 0.83 11.5 %
SPAREBANK 1 SMN – 3Q14 UPDATE
EPEC BPS
Source: Fondsfinans research 10
2Q14
16.0 %
3Q14
14.9 %
We are impressed by the net interest margins reported by the savings banks, and believe that cheaper funding will give resilience to lending margin pressure also going forward.
We increase our target price for SMN to NOK 74 (70), which implies a P/B of 1.18x 2014E and a P/E of 9.4x 2015E.
Full year and quarterly estimates ESTIMATES
ba
2013
2014E
2015E
2016E
4Q14E
1Q15E
2Q15E
3Q15E
4Q15E
1Q16E
2Q16E
3Q16E
Net interest income Net commission income Other income Total core incom e
1,616 1,136 327 3,079
1,793 1,162 333 3,287
1,958 1,159 277 3,394
2,046 1,202 272 3,520
463 286 74 823
488 285 70 842
484 281 69 834
482 287 69 838
492 294 71 857
500 296 68 864
506 298 68 873
503 295 68 865
515 302 69 886
-1,722
-1,761
-1,757
-1,796
-425
-451
-440
-443
-436
-438
-450
-453
-445
1,357
1,526
1,637
1,724
398
391
394
395
421
426
423
412
440
-101
-83
-180
-294
-23
-28
-34
-41
-49
-56
-63
-71
-78
1,256
1,444
1,457
1,430
375
364
360
354
373
370
360
342
362
Total expenses Pre-provision profit (core item s) Loan loss provision Pre-tax profit (core item s) Total financial incom e
502
749
564
605
170
120
170
138
127
129
181
148
137
Pre-tax profit
1,758
2,193
2,021
2,035
545
484
530
492
499
499
541
490
498
Net profit (recurring)
1,370
1,788
1,596
1,607
444
382
419
389
394
394
428
387
394
Net profit (reported)
1,384
1,758
1,596
1,607
444
382
419
389
394
394
428
387
394
6.9 6.6
8.8 7.7
7.9 8.0
8.0 7.7
2.2 2.2
1.9 1.9
2.1 1.9
1.9 2.0
2.0 2.1
2.0 2.1
2.1 1.9
1.9 1.9
1.9 2.0
2013
2014E
2015E
2016E
3Q14
4Q14E
1Q15E
2Q15E
3Q15E
4Q15E
1Q16E
2Q16E
3Q16E
79,836 115,361 11,036
87,173 118,614 12,373
90,223 122,765 13,455
93,564 127,311 14,554
86,008 117,195 12,131
87,173 118,614 12,579
87,546 119,122 12,484
88,800 120,829 12,873
89,853 122,261 13,267
90,223 122,765 13,661
90,905 123,693 14,308
92,082 125,294 13,906
93,203 126,820 14,300
EPEC (rep.) EPEC (adj.) BALANCE SHEET
SPAREBANK 1 SMN – 3Q14 UPDATE
3Q14
Net lending to customers Total assets Total equity
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Key ratios ESTIMATES
KEY FIGURES ROE ROE (core banking) ROA RORWA RORWA (core banking) C/I C/I adj. Costs in % of total assets Loan loss ratio (gross loans) Net interest margin (normalised) Deposit-to-loan ratio Net Loans/Equity
SPAREBANK 1 SMN – 3Q14 UPDATE
CET 1 ratio (transition rule) Tier 1 ratio (transition rule) Tier 2 ratio (transition rule)
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2013
2014E
2015E
2016E
3Q14
4Q14E
1Q15E
2Q15E
3Q15E
4Q15E
1Q16E
2Q16E
3Q16E
13.13 % 8.37 % 1.24 % 1.58 % 1.12 % 48 % 56 % 1.54 % 0.13 % 1.45 %
15.02 % 8.62 % 1.50 % 1.92 % 1.20 % 44 % 54 % 1.51 % 0.09 % 1.53 %
12.36 % 7.99 % 1.32 % 1.69 % 1.25 % 44 % 52 % 1.46 % 0.20 % 1.62 %
11.48 % 7.16 % 1.28 % 1.64 % 1.27 % 44 % 51 % 1.44 % 0.31 % 1.63 %
14.89 % 14.85 % 1.49 % 1.91 % 1.97 % 43 % 43 % 1.44 % 0.11 % 1.56 %
12.38 % 11.90 % 1.29 % 1.66 % 1.60 % 47 % 48 % 1.53 % 0.13 % 1.64 %
13.36 % 12.90 % 1.43 % 1.85 % 1.76 % 44 % 44 % 1.48 % 0.16 % 1.65 %
12.27 % 11.81 % 1.30 % 1.68 % 1.62 % 45 % 46 % 1.48 % 0.19 % 1.61 %
12.07 % 11.62 % 1.29 % 1.66 % 1.62 % 44 % 45 % 1.43 % 0.22 % 1.61 %
11.72 % 11.27 % 1.28 % 1.66 % 1.61 % 44 % 45 % 1.43 % 0.25 % 1.62 %
12.23 % 11.80 % 1.39 % 1.80 % 1.74 % 43 % 43 % 1.46 % 0.28 % 1.65 %
10.97 % 10.54 % 1.25 % 1.61 % 1.55 % 45 % 45 % 1.46 % 0.31 % 1.62 %
11.17 % 10.73 % 1.24 % 1.60 % 1.56 % 44 % 44 % 1.41 % 0.34 % 1.62 %
0.70 7.2
0.68 7.0
0.68 6.7
0.69 6.4
0.67 7.1
0.68 6.9
0.66 7.0
0.70 6.9
0.67 6.8
0.68 6.6
0.66 6.4
0.71 6.6
0.68 6.5
10.7 % 12.6 % 14.2 %
11.9 % 13.7 % 16.5 %
12.6 % 14.4 % 17.1 %
13.4 % 15.1 % 17.7 %
11.5 % 13.4 % 16.1 %
11.9 % 13.7 % 16.5 %
12.0 % 13.9 % 16.7 %
12.1 % 13.9 % 16.7 %
12.2 % 14.0 % 16.7 %
12.6 % 14.4 % 17.1 %
13.5 % 15.3 % 18.0 %
12.8 % 14.5 % 17.2 %
12.8 % 14.6 % 17.2 %
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
SPAREBANK 1 SMN – 3Q14 UPDATE
The bank has exposure to the financial markets. Higher volatility and increased risk premium and credit spreads could affect income and valuations negatively
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Share information SPAREBANK 1 SMN
SPAREBANK 1 SMN – 3Q14 UPDATE
Share data
Share data Sector Bloomberg Risk rating Outstanding shares (million) Market cap (NOK billion) Total assets (NOK billion) Net lending (NOK billion) Free float Average volume (1000s last 12m) High/low 52w Weight PCC index Rel. Perf 3/6/12 Abs. Perf. 3/6/12
Shareholders
Banks MING NO Equity Low 129.8 7.9 118.6 86.0 94 % 153.8 60.5/ 50.0 38.40 % 19/ 17/ 10 14/ 17/ 20
Source: Bloomberg, Fondsfinans research 14
Odin Forvaltning As Sparebankstiftelsen DnB Norge Pareto Aksje Norge Nordea Norge Verdi Odin Norden State Street Vind LV Wimoh Invest MP Pensjon Total number of EC shares
3.1 % 3.1 % 2.7 % 2.7 % 2.4 % 2.2 % 2.0 % 2.1 % 1.8 % 1.6 %
4,042 3,965 3,522 3,477 3,104 2,855 2,654 2,736 2,359 2,058
23.7 %
129,836
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.
Disclaimer Our research and general presentations, also available at our website www.fondsfinans.no, are provided for information purposes only. They should not be used or considered as an offer to sell or a solicitation of an offer to buy any financial instruments. Any opinion expressed are subject to change without prior notice. Our research and presentations are based on information from various sources believed to be reliable. Although all reasonable care has been taken to ensure that the information herein is not misleading Fondsfinans AS makes no representation or warranty expressed or implied as to its accuracy or completeness.
Recommendation distribution as of 29.10.14:
Companies in each recommendation category that have been investment banking clients over the past 12 months:
Recommendation Buy Neutral Sell Total
Recommendation Buy Neutral Sell Total
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No 50 15 3 68
Percent 74 % 22 % 4% 100 %
No 4 0 0 4
Percent 8% 0% 0%
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 10.09.14. Ownership per 13.10.14 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): 69.224, corresponding to 0.0% of the company share capital Fondsfinans may hold shares in Sparebank 1 Midt-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 Midt-Norge. Fondsfinans has not acted as corporate adviser, lead manager in IPO etc. during the past 12 months. This report was issued and distributed 03.11.14.
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