Nova KBM Group (KBMR SV, KBMR LJ)

Transcription

1 (KBMR SV, KBMR LJ) In light of equity increase in Warsaw Analyst: Simon Krajnc Recommendation Current Old Contact: +386 (0) Buy (12.3; April 18 th, 2011) Buy (15.5; July 16 th, 2010) Key data Target price (12M) ( ) 12.3 Upside/(downside) (%) 45.0 Current price 8.5 Market cap ( m) week range ( ) Average daily turnover ( m) Free float (%) 49.0 Primary stock exchange Ljubljana SE Audit ERNST&YOUNG Next results published April 25 th, 2011 Internet site Forecasts and ratios E 2012E Net interest income ( m) Net non-interest income ( m) EPS P/E Book v. per share P/B DPS Divid. yield (%) Net inter. margin Share price performance (%) 1 m. 3 m. 6 m. 1 year KBMR SV SX7P Price in 50,0 45,0 40,0 35,0 30,0 25,0 20,0 15,0 10,0 5,0 0, kbmr sv equity sx7p index Date Source: Bloomberg (July 14 th, 2011) Index points NKBM Group 2010 annual results 's net income in 2010 amounted up to EUR 11.4 m, which on a year level represents an 11.4% increase. In 2009, the net income of NKBM reached EUR 12.8 m, the year previous to this EUR 17.4 mio. The parent bank attributed EUR 9.4 m to the total net company's profit, while its subsidiary bank delivered profit of EUR 7.4 m from which EUR 5.3 m PBS and EUR 2.3 m Adria Bank. Associate insurance company Zavarovalnica Maribor contributed a profit of EUR 5.3 m. On the other hand, in the period from April until December 2010 Credy Banka accumulated a loss of EUR 6.7 m and in the twelve months of 2010 KBM projekt's total loss reached EUR 9.8 m. In 2010, the Group's profit from continuing operations before impairment losses and provisions was EUR m. The Group's net provisions and impairment losses reached EUR 83.2 m, and they were the main reason for NKBM s loss of EUR 7 m in the last quarter of In 2010, the Group's net interest income reached value of EUR m, which is a 7.9% increase y-o-y. The largest share of the increase can be attributed to the decrease in the official bank rate. Namely, due to this change, the Group s interest income had decreased by 3.1 per cent to EUR m, whereas the company s interest expense in the same year had decreased by 15.0 per cent to EUR m. The total group's non-interest income in 2010 increased by 15.8 per cent from EUR 71.3 m in 2009 to EUR 82.6 m last year. The higher non-interest income has been mainly due to higher net fee and commission income, share of profit of associates and increased dividend income. This was offset by losses on financial assets and liabilities held for trading. The share of profit or loss from associates and joint ventures increased from zero level in 2009 to EUR 5.7 m in The improved results are essentially due to the strong performance of Zavarovalnica Maribor (ZM), which turned its 2009 loss into EUR 5.7 m of profit in Net fee and commission income increased by 6.1% to EUR 61.3 m, dividend income increased from EUR 0.1 m to EUR 1.7 m. Other operating net income, which includes income from non-banking services and income from investment property used in operating leases as well as related expenses, has increased by 25.7% y- o-y to EUR 9.3 m. In 2010, Nova KBM's total non-interest income have increased by 11.4 per cent and reached a level of EUR m. The higher non-interest income in the last year has been mainly due to increased administrative costs, provisions and impairments. The administrative costs of the NKBM Group have increased to EUR m in 2010, which represents a 14.2 percentage increase on a year to year basis. The largest share of this increase can be attributed to Credy Banka. Nova KBM has decreased the number of employees in Credy Banka from 729 at the end of 2009 to approximately 390 at the end of KD Banka d.d., Neubergerjeva 30, 1000 Ljubljana, Slovenija

2 Net interest income and net non-interest income in , , , , ,00 0, , , , , net interest margin non interest income Other Distribution of liabilities as at % 1% 11% 3%1% 66% Distribution of assets as at % 3% 9% 0,3% Profitability 25,0% 20,0% 15,0% 10,0% 5,0% 0,0% 73% Deposits Loans from banks and customers Reserves Other Subordinated liabilities Debt Securities Loans Held to maturity f inancial assets Av ailable-f or-sale f inancial assets Other Financial assets held for trading ROE Cost to Revenue ratio Net interest margin 2,7% 2,6% 2,6% 2,5% 2,5% 2,4% 2,4% 2,3% The net provisions of reached EUR 3.2 m at the end of 2010, while at the end of 2009 Nova KBM recorded a positive net income results from provisions in the amount of EUR 1.3 m. The total amount of impairments in 2010 was EUR 80.0 m, which was 2% higher than the previous year. The increase in impairments is mainly due to increased impairments of other assets, mainly land, which has been recorded in the books of Nova KBMS s associate company from the real-estate sector. Tax expenses in 2010 have increased for substantial 40.4 per cent, reaching EUR 6.6 m. The total assets of were equal to EUR 5.8 bn at the end of 2010, which is 1.4 per cent higher than their level at the end of In 2010, gross loans increased by 6.4% to EUR 4.6 bn. In 2010, the available-for-sale financial assets amounted to EUR m. Y-o-y they have decreased by EUR m or 16.1%. Held to maturity investments which comprise government and privately issued debt securities have increased by 23.6 per cent on a year level, reaching a value of EUR m at the end of The financial assets held for trading have decreased to EUR 3.1 m, which represents an 82% decreased compared to The value of property, plant and equipment at the end of 2010 was equal to EUR 92.7 m, which is 26.5% more than the previous year. Nova KBM s intangible assets have risen to EUR 32.5 m in 2010 from EUR 27.7 in Investments in associates and joint ventures accounted for using the equity method have increased to EUR 41.7 m, which represents a 15.5% increase on a year to year level. Other assets, which include inventories, account and other receivables, deferred costs and accrued revenues, receivables for fees and commissions and noncurrent assets and disposals s classified as held for sale, have increased by 5.5% in 2010 compared to The total amount of other assets as at 31 st December 2010 reached a value of EUR m. Nova KBM s total liabilities last year increased by 1.4 per cent to EUR 5.4 m. The increase in liabilities was mainly due to the increase in financial liabilities measured at amortized cost. In 2010, deposits from customers, which have the greatest share in total financial liabilities, have increased by 5.9 per cent to EUR 3.9 m. Loans from banks have decreased by 5.4 per cent to EUR 1.08 m. The amount of debt securities have decreased by 27.5% to EUR 65.5 m. On a year level, provisions decreased by 3% to EUR 22.6 m. Other liabilities, which include liabilities to Bank of Slovenia, to its employees, payment card operators and suppliers, decreased in 2010 by 25.1% to EUR m. Financial liabilities to the central bank levelled to EUR m, which represents a 31.7% decrease. 62,0% 60,0% 58,0% 56,0% 54,0% 52,0% 50,0% 48,0% 46,0% Cost to Revenue ratio loans/deposits ratio 125,0% 120,0% 115,0% 110,0% 105,0% 100,0% KD Banka Equity Research

3 Nova KMB's valuation Nova KBM d.d. is the parent company of, which besides the parent company consist of 11 other subsidiaries. In addition to this, Nova KBM d.d. has equity investments in two associates. The companies within the group offer wide range of financial services, which include banking, mutual & pension funds, insurance, leasing, real-estate and other services. The shareholder structure of as at was the following: Republic of Slovenia owned 41.5%, the share of both Kapitalska družba d.d. and Slovenska odškodninska družba d.d. was 4.8% each, households held 23.0%, other financial organisations held 10.8%, foreign investors owned 9.2%, non-financial companies held 3.7% and the share of banks was 2.3%. Non-performing loans classifies clients into five different credit risk categories from A to E based on an internally adopted methodology. The basic criteria for the credit classification for all customers include delay in payments and critical events such as bankruptcy. In group A, the Nova KBM classifies all debtors for which the bank does not foresee difficulties in repayment of liabilities. Claims against debtors which have been late for period more than 6 months are classified under categories D and E and are considered as non-performing loans. In a somewhat broader view, claims against debtors who are classified in group C are in certain cases also considered as non-performing loans. The share of debtors as at which were rated in category A and B was equal to 76.3% of the total portfolio. At the end of 2009, the share of these debtors was 81.4%, whereas at the end of 2008 the share of reliable debtors was 92.35%. The following table presents the credit rating structure of the 's loan portfolio as at and : Credit rating % of portfolio % of portfolio A B C D E In 2010, the total amount of loan impairment losses reached EUR m. in EUR million Large corporate customers Micro enterprises and SME's Sole proprietors Households Other Domestic banks State Non-profit household service providers Foreign banks Other foreign customers Customers not classified by market segment Total loan impairment losses KD Banka Equity Research

4 In the next table we present the value of non-performing loans (NPLs) in the Group's total loan portfolio: Gross non-performing loans -NPLs (D,E) 320, ,484 Impairment losses for NPLs (D,E) 151, ,084 Net NPLs (D,E) 169, ,400 Total gross loan portfolio 4,333,789 4,612,900 Total net loan portfolio 4,055,902 4,281,300 Gross NPLs/Total gross loan portfolio (%) Net NPLs/Total net loan portfolio (%) At the end of 2010, the share of gross non-performing loans (loans given to customers classified in group D or E) reached EUR m, which represents 12.1% of the total gross loan portfolio. The share of non-performing loans at the same date a year before was 7.41% or EUR m. The value of the total amount of guarantees in 2010 was EUR m, which were recorded as an off-balance-sheet item. Capital adequacy The capital adequacy ratio as at , calculated in accordance with Bank of Slovenia s regulations was equal to 10.9%, which compared to the previous year was 0.8 percentage points lower (11.7%). Bank of Slovenia s regulations demand minimum capital adequacy ratio of 8%. Compared to 2009 and 2008, when the value of the Tier I capital adequacy ratio was 8.1%, Nova KMB s Tier I capital adequacy ratio, at the end of 2010 was somewhat lower and equalled 7.4%. Tier I capital is comprised of shareholders equity and retained earnings less accumulated losses and other Tier I recognized capital securities business plan outline plans for 2011 reveal forecasted pre-tax profit from continuing operations of EUR 33.9 m and EUR 28.0 m of net profit. In the current year, total interest income should reach EUR m, while interest expense should not exceed EUR m. According to Nova KBM s plan, net fee and commission income this year should equal EUR 57.5 m. Net provisions and impairments should reach a value 67.2 mio. Our estimates regarding the company s 2011 net income are somewhat more conservative. We believe that the Group s pre-tax profit from continuing operations should equal EUR 24.0 m, its net interest income should reach EUR 156 m, total costs (administrative costs and amortization) should level around EUR 128 m. According to our estimates net impairment losses and provisions should reach approximately EUR 71.0 m. Capital increase In the beginning of April The Securities Market Agency and the Polish Financial Supervision Authority have confirmed the prospectus for Nova KBM s shares public offering. The price of the new shares has been set at EUR 8. The Bank intends on collecting net proceeds of up to EUR m. Forty per cent of the collected net proceeds from the offering, Nova KBM plans on using for increasing its core Tier I capital ratio, the remaining amount should be allocated for implementing the Group s growth strategy: expending its lending activity, takeover of Zavarovalnica Maribor and entering new markets. A successful public offering, which is necessary, would imply an increase in equity and thus improved capital adequacy ratio and better credit rating. Since the new shares will be issued at a price below their current book value, if present shareholders do not increase their holdings of KBM s shares, the new issue will inevitably decrease the book value of their existing holdings. In our opinion, a price of EUR 8.0 per share should secure Nova KBM up to EUR m of new equity. Given the value of the new share issue the new book value per share should equal EUR 12.8 (the book value per share at the end of 2010 was EUR 15.2). KD Banka Equity Research

5 Valuation Models Forecasted balance sheet of NOVA KBM Group for the period Assets e 2012e 2013e 2014e 2015e 2016e 2017e 2018e 2019e 2020e As at in thousand EUR Financial assets held for trading 17,308 3,148 Financial assets designated at fair value through profit or loss 24,736 16,705 Available-for-sale financial assets 1,046, ,006 Held-to-maturity financial assets 145, ,220 48,136 51,535 55,142 59,002 63,131 67,550 72,279 77,338 82,752 82,752 1,322,731 1,481,953 1,600,372 1,760,709 1,936,780 2,052,986 2,279,977 2,450,658 2,633,595 2,870,618 Loans and advances to banks 211, , , ,742-1,129,974-1,635,473-2,233,587-2,537,796-3,217,519-3,721,203-4,255,992-4,936,911 Loans and advances to customers 3,844,138 4,034,927 4,409,103 4,939,844 5,334,574 5,869,029 6,455,932 6,843,288 7,599,923 8,168,861 8,778,650 9,568,728 Cash and balances with the central bank 180, , , , , , , , , , , ,394 Non-current assets and disposal groups classified as held for sale and discontinued operations 6,812 4,291 Hedging instruments 0 0 Property, plant and equipment 73,257 92,699 Investment property 27,790 44,966 Intangible assets 27,713 32,481 Investments in associates and joint ventures accounted for using the equity model Current tax assets 5,005 3,739 Deferred tax assets 12,348 10,540 Other assets 126, , , , , , , , , , , ,582 36,081 41,719 43,388 45,123 46,928 48,805 50,758 52,788 54,899 57,095 59,379 61, , , , , , , , , , ,664 TOTAL ASSETS 5,785,637 5,866,657 5,923,885 6,163,950 6,363,330 6,568,711 6,748,726 6,965,453 7,292,689 7,548,789 7,828,522 8,195,581 Source: 2009 Annual report of the NOVA KBM GROUP and NOVA KBM d. d., unaudited report on operations of the NOVA KBM GROUP for the period January December 2010, own calculations KD Banka Equity Research Stran 5

6 Liabilities&Equity e 2012e 2013e 2014e 2015e 2016e 2017e 2018e 2019e 2020e As at in thousand EUR Deposits from banks 157, , , , , , , , , , , ,523 Deposits from customers 3,507,536 3,712,304 4,120,657 4,573,930 4,985,583 5,434,286 5,977,715 6,455,932 7,036,966 7,670,292 8,360,619 9,113,074 Debt securities 90,437 65,472 58,925 53,032 47,729 42,956 38,661 34,795 31,315 28,184 25,365 22,829 Subordinated liabilities 192, , , , ,239-1,049,167-1,421,762-1,686,367-2,103,700-2,498,539-3,001,097-3,501,232 Financial liabilities due to central bank 190, , , ,421 94,879 85,391 76,852 69,167 62,250 56,025 50,422 45,380 Loans from banks 1,138,711 1,076,829 1,226,244 1,275,938 1,317,209 1,359,723 1,396,986 1,441,849 1,509,587 1,562,599 1,620,504 1,696,485 Loans from customers Financial liabilities associated to transferred assets 4,658 0 Financial liabilities held for trading 1,442 6,112 Hedging instruments 0 0 Provisions 23,274 22, Current tax liabilities 1, Deferred tax liabilities 4,796 5,806 Other liabilities 41,696 47,226 TOTAL LIABILITIES 5,354,363 5,345,687 5,571,886 5,820,365 6,005,821 6,199,638 6,367,740 6,574,027 6,888,693 7,125,813 7,390,692 7,741,527 Shareholders' equity 351,999 Share capital 27,210 27,210 Share premium 78,314 78,314 Reserves from profit 281, ,010 Revaluation reserves -3,458-6,410 Retained earnings/loss 9,161 2,188 Treasury shares 1,412 Shareholders' equity excluding non-controlling interest 392, ,900 Non-controlling interest 38,909 42,089 TOTAL SHAREHOLDERS' EQUITY 431, , , , , , , , , , , ,054 TOTAL LIABILITIES AND SHAREHOLDERS EQUITY 5,785,637 5,866,657 5,923,885 6,163,950 6,363,330 6,568,711 6,748,726 6,965,453 7,292,689 7,548,789 7,828,522 8,195,581 Source: 2009 Annual report of the NOVA KBM GROUP and NOVA KBM d.d., unaudited report on operations of the NOVA KBM GROUP for the period January December 2010, own calculations KD Banka Equity Research Stran 6

7 Forecasted income statement for the period Income statement 2011e 2012e 2013e 2014e 2015e 2016e 2017e 2018e 2019e 2020e Net interest income 156, , , , , , , , , ,627 Net non-interest income 65,163 71,087 73,967 76,360 78,825 80,985 83,585 94,805 90, ,771 Administrative costs 115, , , , , , , , , ,685 Depreciation and amortisations 12,943 14,022 14,561 14,561 14,562 14,562 14,562 14,562 14,562 14,562 Total Costs 128, , , , , , , , , ,247 Share of profit of associates and joint ventures accounted for using the equity method 1,736 1,952 2,031 2,112 2,196 2,284 2,375 2,470 2,569 2,672 Provisions and impairment losses 71,087 47,391 43,148 38,180 32,844 26,995 20,896 21,878 22,646 23,486 Net income before taxes 24,336 53,067 59,240 70,472 79,394 91,771 99, , , ,337 Net income after taxes 19,469 42,453 47,392 57,082 64,309 74,334 80,894 87,312 87,893 95,853 Source: Own calculations Cost of equity Risk-free yield 4.5 % Risk premium 5.0 % We have calculated the cost of capital using a CAPM model. The inputs of the model are the following: we have determined the risk free yield using the yield on a ten year Slovenian government bond which equals to 4.5%, the risk premium has been set at 5.0%, while other premium which accounts for size or company specific risks has been set at 1.6%. All in all, this accounts for a weighted cost of equity of 11.1%. Other premium (for size, etc.) 1.6 % Beta 1.0 Cost of equity (CAPM) 11.1 % Source: Own calculations KD Banka Equity Research Stran 7

8 Residual Income model 2011e 2012e 2013e 2014e 2015e 2016e 2017e 2018e 2019e 2020e Book value at beginning EPS DPS ROE (bgn BV) 3.4% 7.3% 7.8% 8.9% 9.5% 10.3% 10.5% 10.7% 10.0% 10.3% r 11.1% 11.0% 10.9% 10.8% 10.7% 10.6% 10.5% 10.4% 10.3% 10.0% ROE -r -7.7% -3.7% -3.1% -1.9% -1.2% -0.3% 0.0% 0.3% -0.3% 0.3% Residual income Terminal value 0.86 R 10.00% g = 3.00% Value of share 11.0 Source: Own calculations We have valued s shares using a residual income model and peer analysis. The residual income model expresses the equity value as sum of its book value and the present value of the residual income. For the terminal value two factors are important, that is the excess return and the quantity of net operating assets. In Nova KBM s valuation we have assumed that the rate of return on equity for the first five years is lower than the cost of equity. Taking into account the discount factor of 10% and the 3% terminal growth rate we have come to a current fair value of EUR 11.0 for the shares of Nova KBM. KD Banka Equity Research Stran 8

9 Peer analysis Company Mcap Currency P/B P/E PKO BANK POLSKI SA 57,375,000 PLN OTP BANK PLC. 1,771,000,000 HUF RAIFFEIS.INTL. BANK HOL. 7,600,000 EUR ERSTE GROUP BANK AG 13,684,330 EUR UNICREDIT SPA 34,821,770 EUR ABANKA VIPA 252,995 EUR NOVA KBM EUR Median Source: Bloomberg, own calculations Deviation (+,-) 28.6 % 45.5 % When determining Nova KBM s peers we have chosen only companies, which are similar in terms of risk and other general criteria. An important criterion was the similar regional presence of the banks. We based our analysis on two valuation multiples that is P/E and P/B multiple, which are most commonly used in valuation of banks. Using median of peer s valuation multiples we have come to a current fair value of EUR Final valuation and risks The final 12-month target price has been determined based on weighted average of both the residual income model and the price obtained from the peer analysis. We apply an 80% weigh on the former and 20% on the latter model. The final target price has been thus set at EUR 12.3 (calculated as the current fair price multiplied by the cost of equity), which given the current market price of Nova KBM s share leaves a hefty 45% of potential upside. Main risks to our valuation include unsuccessful issuance of the new shares, which if occurs would most probably be followed by a decrease in the bank s credit ranking and consequently more expensive financing sources. Other risks include macroeconomic risks on the markets where is present and further pressure on the real-estate prices, which would then again worsen the already weak conditions in the construction sector and thus negatively influence the banking sector. Finally, future more restrictive new regulation could potentially harm the profitability of the banking sector. KD Banka Equity Research Stran 9

10 Appendix 1 Analyst Certification The views expressed in this report accurately reflect the personal views of undersigned analyst about the issuer of the security. The undersigned analyst has not and will not receive any compensation for providing a specific recommendation or view in this report. The recommendation has not been disclosed to anyone prior to public release. I own 24 shares of NKBM. Simon Krajnc. Important Disclosures This publication has been either approved or issued by KD Banka in order to promote its investment business. KD is a licensed bank and is a member of Ljubljana Stock Exchange, Inc ( The operations of KD Banka are supervised by Bank of Slovenia ( and Slovenian Securities Market Agency ( Unless it is explicitly otherwise stated in the document, the information on issuers, financial instruments and/or financial strategies: - Is based only on the information, made accessible to general public by issuers of securities or by printed or electronically available public media. - Is made on the basis of analyses of companies past operations data and valuation of future cash flow models inferred from the above-mentioned analyses. 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However KD Banka is not engaged in periodical updating of the recommendation of the issuer under consideration as well as is not obliged to notify readers about any kind of valuation, opinion or forecast changes, which have arisen from occurrences after the recommendation release. When dealing with costumers, KD Banka is not obliged to act in accordance with opinions and assessments expressed in investment recommendations. KD Banka or an associated company may have provided or may be providing corporate finance or other services for the company referred to in this document. KD Banka and its related entities do not own shares of the issuer under consideration. A financial analyst responsible for monitoring of the issuer under consideration has a financial interest concerning the financial instrument of the relevant issuer. Simon Krajnc owns 24 shares of NKBM. KD Banka, its related entities do not have any conflict of interest concerning the issuer under consideration. This research is for our clients only and is based on current public information that we consider reliable, if not stated otherwise. We do not represent it as accurate or complete, and it should not be relied on as such. We seek to update our research as appropriate, but various regulations may prevent us from doing so. Reports are published at irregular intervals as appropriate in the analyst's judgment. Rating definitions Buy Accumulate Hold Reduce Sell >+15% from current price of recommendation +5%< from current price of recommendation<+15% -5%< from current price of recommendation<+5% -15%< from current price of recommendation<-5% <-15% from current price of recommendation Our target prices are established by determining fair value of stocks, taking into account additional fundamental factors and news of relevance of the stock price (such as M&A activities, major forthcoming deals, positive/negative share/sector sentiment, news) and refer to 12 months from now. All fundamentals are to be understood relative to our current fundamental valuation of the stock. The recommendation does not indicate any relative performance of the stock vs. a regional or sector benchmark. KD Banka Equity Research Stran 10

11 Historical recommendation and target price Date of recomm. Recommendation Target price 1. April 18 th, 2011* Buy EUR July 16 th, 2010 Buy EUR 15.5 Investment banking relationship There was no investment banking relationship with the issuer. Published by KD BANKA d. d., Neubergerjeva 30, 1000 Ljubljana, Slovenia. Phone: +386(0) KD BANKA Homepage: On Bloomberg please type: KDBP <GO>. Copyright KD BANKA, d. d. No part of this material may be copied, photocopied or duplicated in any form by any means or redistributed without the prior written consent of KD Banka, d. d. KD Banka Equity Research Stran 11