BSE ticker: 5F4 Bloomberg: 5F4BU Stock price: 2.40 BGN Market capitalization: 263 450 000 BGN 1 year change: +80% 1 year price range: 1.29-2.46 BGN Intrinsic value: 3.68 BGN Recommendation: Buy Price target: 3.68 BGN Valuation Ratios Enterprise Value - Dividend Yield - Gross - Trailing P/E (ttm) 6.57 Forward P/E (2013) 6.50 Price/Sales (ttm) - Price/Book (mrq) 0.49 Enterprise Value/Revenues - (ttm) Profitability and Growth Ratios Return on Equity 7.53% Return on Assets 0.55% EBITDA Margin - Net Profit Margin - Revenue Growth* - EPS Growth* 22% Equity Growth* 7.4% Assets Growth* 5.4% *on yearly basis First Investment Bank was established in 1993. Initially FIB was specialized in offering complex bank services to corporate clients, however over the years it won recognition as a universal bank, offering wide range of bank services and products both to individual and corporate clients. FIB has low equity-to-assets ratio as compared to the average for the banking system in Bulgaria. Although it managed to improve since the second half of 2012, it is near its bottom when assets were growing very quickly and the accumulated profit was unable to compensate it. The situation is currently changing, because the bank reported positive financial results combined with a stagnation of assets. The peak of non-performing loans is not the only change for last two years. The bank reports significant change in the structure of its credit portfolio. Currently the decrease of the loans under watch, past due between 30 and 90 days, is weaker than the average for the banking system, but also shows improvement. The total percent of the nonperforming loans is 16.79%. FIB announces significant growth of the financial result for the second quarter that totaled BGN 15.23 million. However, this was followed by the weakest quarterly data since the listing of the bank. The profit for the third quarter was BGN 2.5 million and from the beginning of the year it reached BGN 24.8 million or 13% higher on yearly basis. The improvement of the financial result is due to the operating activity of the company, including net interest margin. The bank reports significant growth of the income from fees and commissions. The valuation of the share by the two methods is BGN 3.68 and 4.02. The profit of the bank corresponds to higher price, which shows the market imbalance. The factors are many- the upcoming merge with MKB Unionbank and the need of additional capital. - 1 -
Company overview First Investment Bank (FIB) was established in 1993. Initially FIB was specialized in offering complex bank services to corporate clients, however over the years it won recognition as a universal bank, offering wide range of bank services and products both to individual and corporate clients. The bank is focused on the lending of small and medium enterprises and has the second market share in deposits of individuals. It has become public company in 2007 and attracted the market s attention due to the positive financial environment and its development. The public offering of FIB is one of the most successful offerings on Bulgarian Stock Exchange. Market position FIB has 150 offices, which cover the entire territory of the country. Most of the offices are in the biggest towns of the country, which enables it to serve to large amount of individuals and companies. The bank is wellknown with the high-quality services and the wide branch network. Its advantages are boosting its market share in lending and deposits. The assets of the banking system are constantly growing but had a temporary drop in the second quarter of the year. The tendency of increase is returning, albeit at smaller pace. Other interesting fact for the banking system is the stabilization of the loans-todeposits ratio, which to 0.90. Since the end of 2009 we have been seeing its constant drop, thankfully to the conservative lending policy and the growth of the deposits. Currently credits represent 75% of the assets in the banking system. At the same time, the share of financial assets is growing steadily as banks tend to invest in government bonds. The net interest margin of the banking system is declining from 6% in 2008 to 4.5% in 2013. The second period of decrease is determined by large level of deposits and stable level of non-performing loans. Banks substantially lowered interest rates on credits. The trend of rates on deposits is also on the downside during the past two years. Banks that maintain high rates on attracted funds have above average growth of assets, which costs are pressuring their financial results. There is significant difference between interest rates on euro and the local currency despite the stable currency board. Bulgarian banks were striving to collect more funds from the domestic market in effort to decrease their foreign obligations, which explains the large difference in the interest rates. We expect the interest rates in BGN to be higher, but they have a bigger space to drop. Banking sector overview - 2 -
Financial Analysis Assets represent the overall trend in the banking system *Source: Bulgarian National Bank, non-consolidated data The assets of FIB were at their peak at the end of the third quarter. The drop during the second quarter reflects the tendency in the banking system. It could be considered as a period of stability, rather than the beginning of contraction. In last three years FIB reported higher growth of assets than the average for the banking system due to attractive interest rates and the wide branch network. Obviously, the bank is changing interest rate to prevent further decrease of loans-todeposits ratio, which would have negative impact on the financial results. FIB has very low ratio equity-to-assets ratio, compared to the average for the banking system. Its lowest level was in the second part of last year, when the assets were growing very quickly and the profit was unable to keep up with this increase. The situation is currently changing, because the bank reported a positive financial result combined with stable assets. The change of the ratio is very small and FIB will continue to lag behind the average indicator for the banking system of 13.07%. There are two possible scenarios in front of the bank. First opportunity is to rely on the accumulated profit for improvement of the equity, which will take several years with the current trend. The second is FIB to raise additional equity. The capital adequacy is currently supported by hybrid debt and the bank is likely to issue again such instruments. The capital raise will lead to drop of share price. It will be determined from the oversupply of stocks in the current low trading volumes and lack of substantial institutional demand. FIB has the lowest equity-to-assets ratio among Bulgarian public listed banks and it is well below the average for the banking system. Slow increase of credits The equity is lagging the growth of assets Since the beginning of 2012 the loans of the bank are growing slowly. FIB funded also several big projects, including the purchasing of assets of Kremikovtzi and Lead And Zink Complex. The conclusion is that smaller loans had not registered an increase. Their nominal change runs behind the growth of the assets. Credits represent 68% of total assets. It is under the average level for the banking system of 75%. Loans-to-assets ratio is rising since the beginning of the year but the change in trend is not clearly determined from just three quarters so far. The problem for the bank is its low capital adequacy ratio that is limiting the new lending. - 3 -
Corporate credits are 80% of bank s portfolio are the primary source of liquidity and the change in structure of deposits is insignificant. Deposits of corporations are above 20% of total but their increase is offset by the decline of interbank lending. The total level of deposits gained 5% during the last reported twelve months. The bank is focused on corporate clients, while the retail exposures represent 17% of the credit portfolio. Their nominal increase is 7% during the past year. The consumer credits grew by 10%. This segment also has the highest level of impairment as a percent of total credits - 8% for individual loans and 3.2% for corporate loans. NPLs are improving FIB is one of the banks, which is using hybrid instruments for improving of its capital adequacy. This long-term financing is covering the requirements of the regulator. We expect that the bank will continue to rely on hybrid instruments, including for the acquisition of MKB Unionbank. A capital increase is probable due to the low level of equity as compared to assets. The bank after the acquisition should increase its assets by 21%, whereas its equity will improve by 36% as MKB Unionbank has much better equityto-assets ratio. It is unclear how the bank will finance the acquisition but capital raise is an option. The financial result is improving The peak in NPLs was recorded at the end of 2012. The bank reported also a significant change in the structure of the credits. The drop of the loans under watch, which are credits without payments for a period of 30 to 90 days, is weaker than the total, but is also improving. Non-performing loans represented 16.79% of total. Corporate deposits are the fastest growing FIB relies mainly on deposits of households, which are 76% of the total amount of the accumulated funds. Since 2010 households - 4 -
FIB announces significant growth of the financial result for the second quarter. The improvement was due to the operating activity of the company. There was improvement of interest income and expenses. The third quarter was the worst quarter since the bank became public listed as impairment was twice higher than the average for the last 2 years. The bank reports significant growth of the income from fees and commissions during the first half of the year. Income from financial operations is maintained at BGN 2 million per quarter on average. Forecasts Credits are growing and FIB is following the predominant trend of increase of loans in the country. We expect that the banking system will become more aggressive as it is facing significant amount of free cash to land. FIB will not be exclusion of the tendency to lower interest rates and to increase landing. The quality of its portfolio is another question. The large impairment during the third quarter is a reason for cautiousness, although the decline of non-performing loans is very positive factor. 2010 2011 2012 2013E 2014E 2015E 2016E 2017E Total Assets 4 943 973 6 101 669 6 907 337 7 252 704 7 796 657 8 576 322 9 605 481 10 806 166 Loans and Receivables 3 447 076 4 367 699 4 577 729 5 004 366 5 613 593 6 432 242 7 204 111 8 104 625 As Percentage of Assets 69.7% 71.6% 66.3% 69.0% 72.0% 75.0% 75.0% 75.0% Total Liabilities 4 504 210 5 624 625 6 396 106 6 718 378 7 230 219 7 972 578 8 956 282 10 096 525 As Percentage of Assets 91.1% 92.2% 92.6% 92.6% 92.7% 93.0% 93.2% 93.4% Total Equity 439 763 477 044 511 231 534 326 566 438 603 745 649 199 709 642 Net Interest Income 133 751 156 429 147 479 171 005 202 548 216 540 259 472 291 090 As Percentage of Assets 2.71% 2.56% 2.14% 2.36% 2.60% 2.52% 2.70% 2.69% Net Profit 30 838 36 503 28 915 44 113 46 445 58 844 66 029 67 470 Return on Equty 7.01% 7.65% 5.66% 8.26% 8.20% 9.75% 10.17% 9.51% Return on Assets 0.62% 0.60% 0.42% 0.61% 0.60% 0.69% 0.69% 0.62% Forecasts: ELANA Trading - 5 -
Valuation ratios The table presents the the main valuation multiples of liquid Bulgarian banking stocks. We use the consolidates data that are more representative, although the difference to non-consolidated reports is not significant. Multiples comparison Bulgarian American Credit Bank Central Cooperative Bank Corporate Commercial Bank First Investment Bank Last Price 3.88 0.97 82.00 2.40 Number of Shares 12 624 725 113 155 092 6 000 000 110 000 000 Market Capitalization 48 996 558 109 760 439 492 000 000 263 450 000 Net Profit (ttm) -17 471 000 8 011 000 63 879 000 40 115 000 P/E -2.80 13.70 7.70 6.57 Assets (ttm) 785 864 000 3 710 119 000 6 679 799 000 7 343 312 000 P/Assets 0.06 0.03 0.07 0.04 Equity 165 943 000 368 540 000 568 879 000 532 484 000 P/B 0.30 0.30 0.86 0.49 RoE -10.53% 2.17% 11.23% 7.53% RoA -2.22% 0.22% 0.96% 0.55% Calculations: ELANA Trading FIB has the lowest price-to-earnings ratio among the public listed banks in Bulgaria. The stock is traded at half of its book value, which is close to the lowest levels of Central Cooperative Bank and BACB. FIB has much better profitability, despite the large impairments. Comparison to peers Central Cooperative Bank Corporate Commercial Bank First Investment Bank Number of Shares 113 155 092 6 000 000 110 000 000 Price-to-earnings of peers 10.23 10.23 10.23 Net Profit (ttm) 8 011 000 63 879 000 40 115 000 Target price 0.72 108.92 3.73 Price-to-book of peers 0.69 0.69 0.69 Equity 368 540 000 568 879 000 532 484 000 Target price 2.26 65.74 3.36 Price-to-assets of peers 0.09 0.09 0.09 Assets 3 710 119 000 6 679 799 000 7 343 312 000 Target price 2.91 98.64 5.91 Fair Price 1.77 89.59 4.02 Current Price 0.97 82.00 2.40 Premium (Discount) 82.89% 9.26% 67.76% Source: Bloomberg Calculations: ELANA Trading The three largest and most liquid Bulgarian public listed banks are under comparison to banks in Eastern Europe. We use the median of multiples, which are as follow P/E is 10.23, P/B is 0.69 and P/Assets is 0.09. The calculation of fair price of each bank is also included. FIB is undervalues when compared to the three sector multiples. The difference to current price is substantial and the stock is valued at BGN 3.73 when calculated by the net profit. We have to emphasize that financial results of the bank are under negative influence of bad loans and the uncertainties of future deterioration of the credit portfolio. Bad news are already turning positive due - 6 -
Discounted cash to equity value: NPV five year free cash flow 67 033 NPV terminal value 338 289 Value of shareholders' funds 405 322 Shares issued (thousand) 110 000 Value per share 3.68 Share price 2.40 Premium/(discount) 53.53% Residual income valuation: Opening shareholders' funds 540 854 PV five year residual income (56 863) PV terminal value (ex incremental investment) (78 668) PV terminal value (incremental investment) 0 Value of shareholders' funds 405 322 Shares issued (thousand) 110 000 Value per share 3.68 Share price 2.40 Premium/(discount) 53.53% Recommendation and Price Target to the return to economic growth and the financial discipline of Bulgarian companies that managed to survive during the crisis. The market position of the bank, reflected by price-to-assets ratio, is also supporting the valuation of the stock. FIB could become target for acquisition of large foreign bank that is aiming at entering the market but we don t expect this to happen in near future. Recommendation: BUY Target Price: 3.68 BGN Increase: 53% The residual income valuation method is pointing to price that is close to the fair price, calculated by comparison to banks in Eastern Europe. The bank is traded at low P/E ratio, which is a misbalance to the current market conditions. Reasons for the difference are related to the acquisition of MKB Unionbank and the possible need for capital raise. Investors are also worried by the high level of NPLs. Our expectations for the coming months are positive in terms of the market bias to the bank and other liquid positions. Our target price for one year could be achieved after the merge with MKB Unionbank and further improvement of the level of NPLs. Bottom line is that FIB s value is higher than the current price and the bank will prove to be one of the best performing positions on the stock market in 2014. - 7 -
Financial Data Assets 2009 2010 2011 2012 9M 2013 Cash and cash balances with central banks 398 874 495 291 772 955 1 025 499 1 102 969 Financial assets held for trading 9 023 16 641 8 659 5 998 6 344 Financial assets designated at fair value through profit or loss 0 0 0 0 0 Available-for-sale financial assets 285 110 708 861 644 553 711 164 372 127 Loans and receivables 3 163 298 3 447 076 4 367 699 4 577 729 4 837 193 Held-to-maturity investments 30 018 38 207 54 961 92 351 170 500 Derivatives hedge accounting 0 0 0 1 088 3 604 Fair value changes of the hedged items in portfolio hedge of interest rate risk 0 0 0 0 0 Tangible assets 127 683 124 909 115 942 401 118 540 578 Intangible assets 18 115 16 321 14 343 13 546 11 918 Investments in subsidiaries 28 876 34 341 36 371 36 371 36 371 Tax assets 3 270 6 414 4 549 2 117 189 Other assets 20 926 22 465 27 224 40 356 52 631 Non-current assets and disposal groups classified as held for sale 10 094 33 447 54 413 0 0 Total Assets 4 095 287 4 943 973 6 101 669 6 907 337 7 134 424 Deposits from central banks 0 0 0 0 0 Financial liabilities held for trading 0 0 0 0 0 Financial liabilities designated at fair value through profit or loss 0 0 0 0 0 Financial liabilities measured at amortised cost 3 677 884 4 497 390 5 617 141 6 386 247 6 584 567 Financial liabilities associated with transferred financial assets 0 0 0 0 0 Derivatives hedge accounting 248 247 358 1 309 336 Fair value changes of the hedged items in portfolio hedge of interest rate risk 0 0 0 0 0 Provisions 0 0 0 0 0 Tax liabilities 2 901 4 051 3 916 3 238 4 060 Other liabilities 5 444 2 522 3 210 5 312 9 684 Share capital repayable on demand 0 0 0 0 0 Liabilities included in disposal groups classified as held for sale 0 0 0 0 0 Total Liabilities 3 686 477 4 504 210 5 624 625 6 396 106 6 598 647 Issued capital 110 000 110 000 110 000 110 000 110 000 Share premium 97 000 97 000 97 000 97 000 97 000 Other equity 0 0 0 0 0 Revaluation reserves and other valuation differences -146-32 746 6 018 5 771 Reserves (including retained earnings) 169 937 201 957 232 795 269 298 298 214 Treasury shares 0 0 0 0 0 Income from current year 32 019 30 838 36 503 28 915 24 792 Interim dividends 0 0 0 0 0 Minority interest 0 0 0 0 0 Total equity 408 810 439 763 477 044 511 231 535 777-8 -
Continuing operations 2009 2010 2011 2012 9M 2013 Financial & operating income and expenses 192 987 210 802 243 868 243 654 193 177 Interest income 359 724 392 681 432 610 454 979 329 204 Interest expenses 234 823 258 930 276 181 307 500 213 319 Expenses on share capital repayable on demand 0 0 0 0 0 Dividend income 386 32 438 578 503 Fee and commission income 55 993 61 810 78 946 81 590 73 634 Fee and commission expenses 7 174 7 451 8 166 9 388 7 873 Realised gains (losses) on financial assets & liabilities not measured at fair value through profit or loss, net 600 4 551-2 192 2 813 1 955 Gains (losses) on financial assets and liabilities held for trading, net 8 365 7 369 9 596 6 533 5 690 Gains (losses) on financial assets and liabilities designated at fair value through profit or loss, net 0 0 0 0 0 Gains (losses) from hedge accounting, net 0 0 0 0 0 Exchange differences, net -565 950 1 522 1 665 615 Gains (losses) on derecognition of assets other than held for sale, net 0 0 0 0 0 Other operating income 10 613 10 163 7 561 13 941 4 562 Other operating expenses 132 373 266 1 557 1 794 Administration costs 130 267 130 332 147 728 155 201 109 440 Depreciation 17 822 20 522 21 160 20 280 14 551 Provisions 0 0 0 0 0 Impairment 8 615 25 666 34 370 36 035 41 566 Negative goodwill immediately recognised in profit or loss 0 0 0 0 0 Share of the profit or loss of associates and joint ventures accounted for using the equity method 0 0 0 0 0 Profit or loss from non-current assets and disposal groups classified as held for sale not qualifying as discontinued operations 0 0 0 0 0 Total profit or loss before tax from continuing operations 36 283 34 282 40 610 32 138 27 620 Tax expense (income) related to profit or loss from continuing operations 4 264 3 444 4 107 3 223 2 828 Total profit or loss after tax from continuing operations 32 019 30 838 36 503 28 915 24 792 Profit or loss after tax from discontinued operations 0 0 0 0 0 Total profit or loss after tax and discontinued 32 019 30 838 36 503 28 915 24 792 Profit or loss attributable to minority interest 0 0 0 0 0 Profit or loss attributable to equity holders of the parent 32 019 30 838 36 503 28 915 24 792-9 -
Disclaimer Analyst Certification: The research analyst(s) certifies that: (1) all of the views expressed in this document accurately reflect his or her personal views about any and all of the subject securities or issuers; (2) no part of any of the research analyst s compensation was, is, or will be directly or indirectly related to the specific recommendations or views expressed by the research analyst(s) in this document. Financial Interest: ELANA Trading may trade or own shares of the analyzed companies. The research analyst(s) is not holding shares of the analyzed companies, unless otherwise noted. Regulatory Authority: Financial Supervisory Commission, Shar Planina Street 33, 1303 Sofia, Bulgaria Information Disclosure: All reasonable care has been taken to ensure the facts stated are accurate and opinions given are fair and reasonable. Our recommendations are based on information available to the public that we consider to be reliable but for the completeness and accuracy of which we assume no liability. Neither ELANA Trading, nor its directors, officers or employees shall in any way be responsible for its contents. The views expressed may differ from the views of other firm departments or representatives. Additional information is available upon request. Unless otherwise noted, sources for all information in charts and tables are ELANA Trading s calculations. Risks for Investors: Information in this document should not be regarded as an offer to buy or sell any financial instruments. The investment possibilities discussed in this document may not be suitable for certain investors depending on their specific investment objectives and time horizon or in the context of their overall financial situation. In particular, the risks associated with an investment in the securities or the financial instruments under discussion are not explained in its entirety. The prices or values of the securities may go down as well as up and can fluctuate and fall against the investor. The securities or investments may cause the investor to lose the amount invested. Past performance is not a guide to future performance. Changes in exchange rates may have an adverse effect on the value, price or income of the securities or investments. Valuation Methods: Company valuations are based on the following methods: multiple-based (P/E, P/B, EV/EBITDA), historical valuation approaches, peer comparisons, discount models (DCF, DDM) or asset-based evaluation methods. Valuation models are dependent on macroeconomic factors, including interest rates, foreign exchange rates, prices of raw materials, and any expectations about the economy, the market sentiment. The valuation is based on expectations that might change rapidly and without notice, depending on developments specific to individual industries and countries. Recommendations and target prices derived from the models might therefore change accordingly. The application of models depends on forecasts of a range of economic variables, thus there is a range of reasonable variations within models. Any valuation is dependent upon inputs that are based on the subjective opinion of the analysts carrying out this valuation. Recommendations: Analyst(s) recommendations are based on the specific factors for the company, sector, country and global developments, as compared to market indices. Recommendations and opinions reflect ELANA Trading's expectations over the 12-month period following publication from the perspective of long-only investment clients. ELANA Trading reserves the right to express different or contrary recommendations and opinions for different timescales or for other types of investment client. Except as otherwise noted, expected performance over next 12 months vary for different recommendations for Bulgarian stocks as follows: More than 5% higher as compared to SOFIX and BG40 performance BUY HOLD SELL Market performance, +/-5% as compared to SOFIX and BG40 More than 5% lower as compared to SOFIX and BG40 performance Frequency of Recommendations: No schedule of recommendations is available. The frequency of recommendations depends on specific factors to individual companies and the opinion of the analyst(s) for the necessity of minor or major changes. Copyrights: The copyrights of ELANA Trading analyses belong to the Research Department of the brokerage and their content cannot be used for commercial purposes. Replication and redistribution of ELANA Trading analyses content is expressly prohibited without the prior written consent of the appointed contacts listed below. For more information, please contact: Research analyst Phone: E-mail: Internet: Tsvetoslav Tsachev +359 2 810 00 23 tsachev@elana.net www.elana.net - 10 -