Fondsfinans Research – Sparebank 1 SR Bank 2Q15 Update
Prepared by Analyst: Geir Kristiansen, Fondsfinans AS, tel: 23 11 30 11, e-mail: [email protected]
When the going get tough...
13 August 2015
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.
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
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In sum, NII and net commissions were in line with estimates
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Basis swaps (covered bond company) a drag on net financials
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Loan losses at low levels – resilient to oil price in a 12-18 month perspective
We make small changes in estimates
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Lower transferred volumes give higher NII and lower net commissions
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Marginally higher costs – Fee generating business have higher C/I
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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
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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
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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
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2Q15 UPDATE
Continues to deliver
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Estim ate changes Curr. Prev. Curr. Prev.
NOKm 2015E 2015E 2016E 2016E 2015E 2016E
Net interest incom e 2,553 2,514 2,621 2,545 1.6 % 3.0 %
Non-interest income 2,330 2,421 2,353 2,425 -3.8 % -3.0 % Total revenues 4,883 4,935 4,975 4,969 -1.1 % 0.1 % OPEX -2,157 -2,117 -2,222 -2,164 1.9 % 2.7 % Pre-provision profit 2,725 2,818 2,752 2,805 -3.3 % -1.9 % Loan losses -276 -399 -653 -681 -30.9 % -4.1 % Pre-tax profit (PTP) 2,450 2,418 2,099 2,124 1.3 % -1.2 % Tax expense -531 -508 -460 -447 4.6 % 2.9 % Net profit 1,918 1,910 1,639 1,678 0.4 % -2.3 % EPS (NOK) 7.5 7.5 6.4 6.6 0.0 % -2.9 % Dividend (BOK) 2.2 2.2 2.6 2.6 2.3 % -1.4 % Change (%)
2Q15 estimates
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Source: SR Bank, Inquiry Financial, Fondsfinans research
Changes in full-year estimates
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
Lower transferred volumes
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Higher NII, lower net commissions
Marginally higher costs
Lower losses, particularly in 2015E
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Still strong credit quality
ESTIMATES
Lower estimates
Key figures (NOKm ) Actual 1Q15 FF est. 2Q15 Cons. 2Q15 Dev. FF Dev. cons.
Net interest incom e 639 623 634 2.6 % 0.8 %
Net commissions 399 415 423 -3.7 % -5.7 % Other op.revenues 94 141 160 -33.5 % -41.3 % Total revenues 1,132 1,179 1,217 -4.0 % -7.0 % Total OPEX 536 521 519 2.9 % 3.3 % Pre-provision profit (PPP) 596 658 698 -9.4 % -14.6 % Loan losses 44 96 102 -54.3 % -56.9 % Pre-tax profit (PTP) 552 562 596 -1.7 % -7.4 % Net profit 431 444 462 -2.8 % -6.7 % EPS 1.69 1.73 1.82 -2.5 % -7.1 %
Source: SR Bank, Fondsfinans research
Moderate lending growth
Customer lending (NOKm) and growth
7.8% growth YoY in 2Q15E,
including transferred volumes
- Expected 6% growth
- Retail +4.7%
- Corporate +13.8% (11.3% ex. curr.)
Transferred volumes down NOK
2.9bn.
- NOK 31.5bn, 27% of total lending
We expect 2% lending growth in
2016
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LENDING
6.0 % 4.3 % 2.8 % 5.4 % 5.9 % 7.6 % 7.8 % 5.4 % 2.9 % 1.6 % 1.2 % 1.8 % 3.0 %3.3 % 0% 1% 2% 3% 4% 5% 6% 7% 8% 9% 155 160 165 170 175 180 185 190 195 % NOKbS
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Source: SR-Bank, Fondsfinans research
NIM -4 bps in 2Q15 QoQ
Lower lending margins (QoQ)
- Retail: 1.64% (-0.31%)
- Corporate: 2.58% (-0.08%)
Higher deposit margins
- Retail: -0.25% (+0.30%)
- Corporate: -0.38% (+0.08%)
Deposit to loan ratio: 60% (59%)
NII
We expect net interest margin to bottom out in 3Q15
Net interest income and margin
1.43%1.47% 1.51% 1.45% 1.41% 1.36% 1.42% 1.36% 1.36% 1.41% 1.49% 1.43% 1.43% 0.40% 0.60% 0.80% 1.00% 1.20% 1.40% 1.60% 0 100 200 300 400 500 600 700 800 % NOKm NII NIM
Source: SR Bank, , Fondsfinans research
Cost/Income stabilizing around 45%
Cost/Income
Cost growth guidance
- 0-2% annually
- Our estimate: 2.5% growth ex.
one-offs
- Higher than guidance due to
acquisitions and cost inflation
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OPERATING COSTS
42.5 % 47.3 % 45.1 % 42.5 % 47.3 % 43.6 % 43.5 % 45.9 % 45.3 % 44.1 % 43.5 % 44.9 % 43.6 % 30% 32% 34% 36% 38% 40% 42% 44% 46% 48% 50% 460 480 500 520 540 560 580 % NOKm OPEX C/ISource: SR Bank, Fondsfinans research
LOAN LOSSES
Loan losses are still at low levels
Nominal and relative loan losses
Non-performing and other problem
loans down from 0.66% to 0.64% of
loans in 2Q15
Lay-offs in the oil industry will probably
lead to higher losses going forward
Total exposure to oil operations is 8.9%
of EAD
Probability of default 2.1%
Resilient to low oil price in a 12-18 month
perspective
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0.00% 0.10% 0.20% 0.30% 0.40% 0.50% 0.60% 0.0 50.0 100.0 150.0 200.0 250.0 % NOKm LLP LLP in % of AGL (ann.)S
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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 2016
- RoE 9.2%
Still room for increasing dividends
- CET 1 14% in 2017
- Flexibility to monitor capitalization
VALUATION
From premium valuation to discount vs regional peers
Source: SR-Bank, Fondsfinans research
Key figures (NOKm) 2013 2014 2015E 2016E 2017E 2Q15 3Q15E Net interest income (NII) 2,119 2,404 2,553 2,621 2,831 639 629
Other op.revenues 2,348 2,510 2,330 2,353 2,436 493 610
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 -2,276 -536 -541 Pre-provision profit (PPP) 2,448 2,858 2,725 2,752 2,990 596 698 Loan losses -132 -257 -276 -653 -541 -44 -53 Pre-tax profit (PTP) 2,316 2,601 2,450 2,099 2,450 552 645 Taxes -487 -506 -531 -460 -537 -121 -141 Net profit 1,829 2,095 1,918 1,639 1,913 431 504 EPEC 8.0 8.2 7.5 6.4 7.5 1.7 2.0 BPS 55.0 60.2 66.4 70.6 75.5 62.5 64.5 DPS 1.6 2.0 2.2 2.6 3.7
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
(CET 1) 11.1 % 11.5 % 12.6 % 13.7 % 14.0 % 12.3 % 12.4 % Yield 3.5 % 3.5 % 4.5 % 5.2 % 7.5 % P/E 6.3 7.0 6.6 7.8 6.6 P/B 0.83 0.95 0.75 0.70 0.66 ROE 13.7 % 14.2 % 11.8 % 9.4 % 10.2 % 10.8 % 12.4 %
Key figures
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ESTIMATES
Full year and quarterly estimates
INCOME STATEMENT 2014 2015E 2016E 2017E 2Q15 3Q15E 4Q15E 1Q16E 2Q16E 3Q16E 4Q16E 1Q17E
Net interest income 2,404 2,553 2,621 2,831 639 629 658 626 627 663 706 669
Net commission income 1,292 1,620 1,642 1,698 398 406 409 406 406 413 417 413
Other income 440 4 4 4 1 1 1 1 1 1 1 1
Total core incom e 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 -2,276 -536 -541 -551 -555 -549 -554 -564 -569
Pre-provision profit (core item s) 2,080 2,020 2,045 2,256 502 495 518 478 486 522 559 515
Loan loss provision -257 -276 -653 -541 -44 -53 -91 -134 -153 -173 -194 -157
Pre-tax profit (core item s) 1,823 1,744 1,392 1,715 458 442 427 344 333 350 365 358
Total financial incom e 778 705 707 734 94 203 197 175 177 181 173 182
Pre-tax profit 2,601 2,450 2,099 2,450 552 645 624 520 510 531 539 539
Net profit (reported) 2,095 1,918 1,639 1,913 431 504 487 406 398 414 421 421
EPS (rep.) 8.2 7.5 6.4 7.5 1.7 2.0 1.9 1.6 1.6 1.6 1.6 1.6
EPS (adj.) 7.8 7.4 7.3 7.8 1.7 1.9 2.0 1.7 1.7 1.9 2.0 1.8
BALANCE SHEET 2014 2015E 2016E 2017E 2Q15 3Q15E 4Q15E 1Q16E 2Q16E 3Q16E 4Q16E 1Q17E
Net lending to customers 140,920 152,009 155,264 161,511 149,472 151,195 152,009 152,028 152,291 153,387 155,264 157,469
Total assets 174,926 185,550 189,590 197,493 181,889 183,983 185,550 185,572 185,317 186,651 189,590 192,273
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
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
RISK ASSESSMENT
We rate SpareBank 1 SR Bank MEDIUM risk
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Share data
Source: Bloomberg, Fondsfinans research
Shareholders
SRBANK
Share information
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Major shareholders as of
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
03/07/2015
Share data
Sector
Banks
Bloomberg
SRBANK NO Equity
Risk rating
Low
Outstanding shares (million)
255.8
Market cap (NOK billion)
12.7
Total assets (NOK billion)
184.0
Net lending (NOK billion)
151.2
Free float
59%
Average volume (1000s last 12m)
113.3
High/low 52w
61.3/ 46.1
Weight PCC index
0.69%
Rel. Perf 3/6/12
-8/ -2/ -13
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.
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Fondsfinans AS is constantly seeking investment-banking mandates, and may at any time perform investment banking or other services or solicit investment banking or other mandates from companies covered in our analysis and presentations. Fondsfinans AS may from time to time as part of its investment services hold positions in securities covered in our research and presentations. In order to avoid any conflict of interests Fondsfinans AS and its employees will always follow very strictly all internal regulations , recommendations from the Norwegian securities dealers association and relevant legislation and regulations from the supervisory official authorities. Internal holdings will be specified as part of shareholder information.
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Recommendation distribution as of 10.08.15:
Recommendation No Percent Recommendation No Percent
Buy 43 67 % Buy 2 5 %
Neutral 9 14 % Neutral 1 11 %
Sell 12 19 % Sell 0 0 %
Total 64 100 % Total 3
Companies in each recommendation category that have been investment banking clients over the past 12 months:
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 03.07.15.
Ownership per 07.08.15 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):
63.591, 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.
This report was issued and distributed 13.08.15.
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.
