Earnings momentum remains constrained

UmweltBank 4 March 2020 Update
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UmweltBank

Earnings momentum remains constrained

FY19 preliminary results

Banks

4 March 2020

Price

€12.5

Market cap

€383m

Total assets (€bn) at end-FY19

4.1

Shares in issue

30.6m

Free float

84.4%

Code

UBKX

Primary exchange

Munich

Secondary exchange

Xetra

Share price performance

%

1m

3m

12m

Abs

1.2

20.8

43.9

Rel (local)

10.2

30.9

39.3

52-week high/low

€14.25

€8.65

Business description

UmweltBank is a specialised lender with total assets of €4.1bn. It provides financing for renewable energy projects (solar, wind, hydro and biomass), as well as loans for new construction or the renovation of sustainable residential, community and commercial real estate.

Next events

FY19 results

4 May 2020

AGM

25 June 2020

H120 results

August 2020

Analyst

Milosz Papst

+44 (0)20 3077 5700

UmweltBank is a research client of Edison Investment Research Limited

UmweltBank’s (UBK’s) FY19 earnings (based on preliminary results) were broadly flat compared to the prior year and in line with our expectations, as higher earnings before admin expenses and taxes were largely offset by the increase in G&A costs (cost-income ratio of 39.2% vs 32.7% in FY18). High costs related to investments in IT infrastructure and the introduction of new products coupled with persistent market headwinds (low interest rates and weak wind capacity additions in Germany) suggest UBK’s earnings recovery is likely to occur after FY20 (company FY20 PBT guidance is €36m). As a result, we have lowered our earnings forecasts and valuation by c 5–15%.

Year end

Net interest income (€m)

EPS*
(€)

DPS
(€)

P/BV*
(x)

P/E*
(x)

ROE*
(%)

Yield
(%)

12/18

51.2

0.90

0.33

1.5

13.9

11.4

2.6

12/19e**

51.3

0.88

0.34

1.4

14.2

10.3

2.7

12/20e

53.7

0.79

0.36

1.3

15.8

8.7

2.9

12/21e

56.3

0.82

0.38

1.3

15.2

8.6

3.0

Note: *Based on net profit before allocation to reserves for general banking risks and tangible book value including reserves for general banking risks. **Edison estimates based on preliminary numbers.

Stable pre-tax profit amid higher operating expenses

UBK’s FY19 PBT was €37.6m (vs our estimate of €37.8m), with net interest, financial and net valuation income up 4.9% y-o-y to €54.4m. Net commission and fee income nearly doubled to €5.1m, among other things assisted by fees from corporate fixed income issuances. Meanwhile, UBK’s cash G&A expense increased by 21.9% y-o-y to €21.6m in FY19. As a result of the share issue in July 2019, UBK’s total capital adequacy ratio (TCR) improved to 14.5% at end-2019 versus 14.0% at end-2018, providing additional headroom for loan book expansion.

New lending volumes in line with last year

UBK’s new lending was €543m in FY19, largely unchanged from FY18 (€542m). Although UBK has not provided any details, we note its activity was likely affected by the subdued new wind energy capacity additions in Germany (0.9GW vs 2.4GW in 2018). However, this may have been mitigated by lending provided for project repowering. We believe this weakness is likely to persist in the near term (see below). In contrast, solar additions remained robust with close to 4GW added in 2019 (compared to nearly 3GW in 2018). In the German residential sector, growth was relatively modest with building permits in 2019 (excl. December) up 1.3% y-o-y.

Valuation: Fair since recent share price rally

Our revised UBK valuation is €12.0 per share (down from €13.2 previously). This is broadly in line with the current share price as UBK’s shares have appreciated c 31% since our last publication in September 2019. UBK’s FY20e P/BV is 1.3x compared to peer average of 1.1x, while its FY20e return on equity (ROE) (based on our estimates) is slightly ahead of the peer average (based on Refinitiv consensus).

FY19 preliminary results: Stable new lending volumes

UBK reported preliminary pre-tax profit of €37.6m in FY19, which is in line with our forecast (€37.8m) and marginally ahead of last year (€37.3m). Net income (before allocations to reserves) came in at €25.9m (vs our estimate at €26.3m), up 2.3% y-o-y. The bank’s net interest, financial and net valuation income (including the impact of provisions for credit losses) was up 4.9% y-o-y to €54.4m, which we understand was partially assisted by continued loan book growth. Although the full figures have not yet been disclosed, we estimate the above was supported by other factors, including some write-ups on participations or shares in affiliated companies. At the same time, the bank recorded healthy net commissions and fee expenses of €5.1m (up 95% vs €2.6m), which we believe is associated with UBK’s increased activity in corporate fixed-income securities issues.

However, this was largely offset by UBK’s higher G&A expenses, which (excluding minor D&A) went up 21.9% y-o-y to €21.6m in FY19 (somewhat ahead our estimate of 17.4% y-o-y) amid continued team expansion and investments as part of UBK’s strategy (described in our last outlook note). Consequently, UBK’s cost income ratio (CIR) reached 39.2% compared to 32.7% in FY18.

UBK’s new lending volume reached €543m (stable compared to €542m in FY18), which is slightly below our estimate of €557m. Meanwhile, UBK continued to attract new customer deposits, which have grown by a solid 8.5% y-o-y to €2.5bn (close to our forecast figure). Following the share issue in July 2019 (with gross proceeds of c €23.5m), the bank’s TCR improved to 14.5% at end-2019 from 14.0% at end-2018 (CET1 ratio was up to 10.0% from 9.3%). UBK’s total assets reached c €4.1bn at end-2019 (up 10.7% y-o-y).

Exhibit 1: UBK's preliminary FY19 results

€000s, unless otherwise stated

FY19

FY18

Change y-o-y

FY19e

Diff

Net interest, financial and net valuation income*

54,423

51,893

4.9%

55,019

(1.1%)

Net commissions and fee expense

5,084

2,605

95.2%

4,125

23.2%

G&A expenses (ex-D&A)

(21,642)

(17,758)

21.9%

(20,852)

3.8%

Personnel expenses

(11,210)

(9,221)

21.6%

(10,938)

2.5%

Other administrative expenses

(10,432)

(8,537)

22.2%

(9,914)

5.2%

thereof, banking tax and deposit insurance

(1,798)

(1,849)

(2.8%)

(1,631)

10.2%

Other operating income (expense)

(260)

571

n.m.

(483)

n.m.

Pre-tax profit

37,605

37,311

0.8%

37,809

(0.5%)

Income taxes

(11,683)

(11,975)

(2.4%)

(11,475)

1.8%

Effective tax rate

31.1%

32.1%

(103bp)

30.4%

72bp

Net income (before reserves allocation)

25,922

25,336

2.3%

26,334

(1.6%)

 

 

 

 

 

 

New lending volume (€m)

543

542

0.2%

557

-2.5%

Business volume (€m)

4,518

4,119

9.7%

4,326

4.4%

Customer deposits (€m)

2,529

2,330

8.5%

2,493

1.4%

Total assets (€m)

4,095

3,699

10.7%

3,905

4.9%

Equity (€m)

378

333

13.4%

376

0.5%

TCR

14.5%

14.0%

47bp

15.4%

(90bp)

CET1 ratio

10.0%

9.3%

69bp

10.8%

(81bp)

CIR

39.2%

32.7%

650bp

36.0%

324bp

Source: UmweltBank, Edison Investment Research. Note: *Including provisions for credit losses, net financial income (excl. net trading income) and the impact of net valuation changes

German wind and solar sector update

We have discussed the challenges in the German wind energy market extensively in previous notes. The issues continue to impair new capacity additions, which equalled c 924MW in 2019 (down c 60% y-o-y), according to the German Federal Network Agency for Electricity. Meanwhile, new additions in solar energy show persistent strength, with close to 4GW of new capacity in 2019 (vs 2.95GW in 2018, see Exhibits 2 and 3).

Roadblocks in the wind energy sector include extended regulatory requirements, lengthy project approval timelines and a deficit of approved regional plans, as well as resistance from local residents and environmentalists (shown by the numerous projects contested in court). Moreover, the German grand coalition consisting of the Union and Social Democratic Party of Germany (SPD) recently agreed to introduce a minimum distance of 1km from residential areas for new wind farms and the extension of existing projects (although the coalition is still in discussions on the size of areas this should apply to). Earlier estimates of the Federal Environment Agency suggested this would reduce land available for wind farms by 20–50% and limit potential capacity from 80GW to 40–60GW, jeopardising the governmental climate targets.

In contrast, SPD aims to introduce a financial incentive system for residents to raise their acceptance of new wind projects (the so-called Windbürgergeld). This may include direct payments to residents or participation of local communities in the revenue stream of wind farms. The SPD is also looking at potential limitations to the residents’ ability to contest the wind project developments in court.

Exhibit 2: New gross onshore wind capacity in Germany (in MW)

Exhibit 3: New gross solar capacity in Germany

(in MW)

Source: Bundesverband WindEnergie, Deutsche WindGuard, Bundesnetzagentur

Source: Bundesnetzagentur

Exhibit 2: New gross onshore wind capacity in Germany (in MW)

Source: Bundesverband WindEnergie, Deutsche WindGuard, Bundesnetzagentur

Exhibit 3: New gross solar capacity in Germany

(in MW)

Source: Bundesnetzagentur

Forecast revisions

Although UBK’s preliminary results are broadly in line with our estimates, management recently released guidance for FY20 pre-tax profit at €36m, which implies a c 4% decline versus FY19 and is visibly below our earlier forecast (€39.3m). We understand the background to the weaker performance will be a combination of relatively stable earnings before administrative expenses and taxes (despite continued loan book growth) coupled with higher operating costs related to further team expansion and the new IT infrastructure. This suggests UBK’s earnings inflection point will be pushed beyond FY20. Consequently, we reduce our FY20 and FY21 pre-tax profit forecasts to €35.7m and €37.3m, respectively (see Exhibit 4).

Exhibit 4: Forecast revisions

 €000s unless otherwise stated

2019

2020e

2021e

 

prelims

Old

New

Change

y-o-y

Old

New

Change

y-o-y

Net interest and financial income*

54,423

55,984

55,096

-1.6%

1.2%

60,793

57,605

-5.2%

4.6%

Net commissions and fee expense**

5,084

4,370

3,880

-11.2%

-23.7%

4,540

4,610

1.5%

18.8%

Pre-tax profit

37,605

39,319

35,722

-9.1%

-5.0%

43,399

37,282

-14.1%

4.4%

Net income

25,922

26,934

24,720

-8.2%

-4.6%

29,728

25,799

-13.2%

4.4%

CET1 ratio (%)

10.1

10.8

9.9

-90 bps

0 bps

10.9

10.2

-71 bps

26 bps

Tier-1 ratio (%)

11.3

11.8

10.8

-98 bps

-33 bps

11.8

11.1

-75 bps

23 bps

TCR (%)

14.5

15.0

13.8

-122 bps

-46 bps

14.8

14.0

-89 bps

18 bps

CIR (%)

39.2

34.7

39.4

468 bps

26 bps

33.5

40.1

660 bps

65 bps

Source: UmweltBank, Edison Investment Research; Note: *Including provisions for credit losses, net financial income (excl. net trading income) and the impact of net valuation changes. **Includes net trading income.

Our new forecasts imply an ROE for UBK in FY20e of 8.7%, which compares with an average ratio for listed banks from the DACH region at 8.5% (based on Refinitiv consensus). We note that UBK’s FY20e ratio is below our current long-term sustainable ROE estimate of c 11.5% due to a depressed net interest margin (which we expect to bottom out in the near term) and higher operating expenses amid the launch of new products and investments in IT infrastructure. At the same time, UBK’s FY20e P/BV is now 1.3x, which is ahead of peer average of 1.1x (see Exhibit 5). Our revised UBK valuation (based on the implied price to tangible book value model) stands at €12.0 per share (down from €13.2 previously). As the bank’s shares have appreciated c 31% since our last publication in September 2019, our valuation implies no upside potential to the market price.

Exhibit 5: UmweltBank's P/BV and ROE 2020e comparison versus peers

Source: Refinitiv, Edison Investment Research. Note: Ratios for UmweltBank are based on net profit before reserves allocation and book value includes balance sheet value of reserves for general banking risks.

Exhibit 6: Financial summary (000s)

Year ending December

FY15

FY16

FY17

FY18

FY19e

FY20e

FY21e

FY22e

FY23e

Income statement

 

 

 

 

 

 

 

 

 

Net interest income

52,838

53,600

52,166

51,234

51,281

53,716

56,276

60,431

66,175

Net financial income

4,023

5,937

2,909

2,544

6,328

2,508

3,113

3,219

3,327

Net interest and financial income

56,861

59,537

55,075

53,778

57,609

56,224

59,389

63,650

69,502

Provisions (-)

443

(2,228)

(355)

(1,460)

(2,686)

(1,127)

(1,260)

(1,230)

(1,265)

Total administrative expenses

(13,163)

(15,563)

(16,466)

(18,137)

(22,025)

(23,254)

(24,933)

(26,378)

(27,186)

Earnings before administrative costs and taxes

61,340

61,570

56,739

55,447

59,630

58,976

62,215

66,641

72,484

PBT

48,177

46,007

40,273

37,310

37,605

35,722

37,282

40,263

45,297

Net profit after tax

34,087

32,155

27,661

25,335

25,922

24,720

25,799

27,862

31,346

Reported EPS (€)

0.56

0.58

0.60

0.60

0.58

0.55

0.55

0.57

0.64

Adjusted EPS (€)

1.23

1.16

0.99

0.90

0.88

0.79

0.82

0.87

0.97

DPS (€)

0.28

0.34

0.32

0.33

0.34

0.36

0.38

0.40

0.42

Balance Sheet

 

 

 

 

 

 

 

 

 

Cash and balances at central banks

33,171

54,591

32,460

31,556

137,837

48,882

79,442

80,997

63,113

Claims on banks

321,602

149,281

122,622

113,100

118,755

237,511

239,886

431,795

345,436

Claims on customers

2,098,150

2,229,817

2,273,561

2,392,770

2,506,839

2,643,322

2,766,029

2,889,671

2,989,652

Bonds and other fixed-interest securities

288,437

747,214

1,023,677

1,125,709

1,294,566

1,424,022

1,424,022

1,281,620

1,409,782

Tangible assets, goodwill and intangible assets

759

1,174

1,202

1,487

1,487

1,487

1,487

1,487

1,487

Other assets

15,553

24,165

31,479

34,496

35,496

36,496

37,496

38,496

39,496

Total assets

2,757,672

3,206,242

3,485,001

3,699,119

4,094,979

4,391,721

4,548,362

4,724,066

4,848,966

Liabilities to banks

570,938

860,728

1,011,950

1,005,593

1,157,941

1,238,997

1,177,047

1,118,194

1,062,285

Liabilities to customers

1,938,174

2,055,684

2,157,005

2,330,019

2,529,236

2,731,575

2,930,980

3,144,941

3,302,188

Accruals and deferred expense

1,440

1,220

1,012

825

684

684

684

684

684

Deferred tax liabilities

0

231

148

127

127

127

127

127

127

Other liabilities

157,095

189,952

206,873

243,360

254,485

256,533

265,629

275,664

286,704

Total liabilities

2,667,647

3,107,816

3,376,987

3,579,925

3,942,472

4,227,915

4,374,466

4,539,611

4,651,988

Total shareholders' equity

90,025

98,426

108,013

119,194

152,507

163,806

173,896

184,456

196,978

BVPS (€)

3.3

3.6

3.9

4.2

4.9

5.2

5.5

5.7

6.0

TNAV per share (€)

6.0

6.9

7.6

8.2

8.8

9.3

9.8

10.3

10.8

Ratios

 

 

 

 

 

 

 

 

 

NIM

2.06%

1.87%

1.62%

1.49%

1.38%

1.33%

1.32%

1.36%

1.44%

Costs/income

22.0%

26.9%

29.4%

32.7%

39.2%

39.4%

40.1%

39.6%

37.5%

ROE

22.2%

18.0%

13.7%

11.4%

10.3%

8.8%

8.6%

8.7%

9.2%

CET1 ratio

8.1%

8.5%

8.9%

9.3%

9.9%

9.9%

10.2%

10.5%

11.0%

Tier 1 ratio

8.7%

9.9%

10.4%

10.7%

11.2%

10.8%

11.1%

11.4%

11.9%

Capital adequacy ratio

10.6%

11.6%

12.4%

14.0%

14.2%

13.8%

14.0%

14.3%

14.7%

Payout ratio (%)

22.7%

29.3%

32.3%

36.8%

40.6%

45.6%

46.7%

46.2%

43.7%

Customer loans/total assets

76.1%

69.5%

65.2%

64.7%

61.2%

60.2%

60.8%

61.2%

61.7%

Loans/deposits

108.3%

108.5%

105.4%

102.7%

99.1%

96.8%

94.4%

91.9%

90.5%

Source: UmweltBank, Edison Investment Research


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Copyright: Copyright 2020 Edison Investment Research Limited (Edison).

Australia

Edison Investment Research Pty Ltd (Edison AU) is the Australian subsidiary of Edison. Edison AU is a Corporate Authorised Representative (1252501) of Crown Wealth Group Pty Ltd who holds an Australian Financial Services Licence (Number: 494274). This research is issued in Australia by Edison AU and any access to it, is intended only for "wholesale clients" within the meaning of the Corporations Act 2001 of Australia. Any advice given by Edison AU is general advice only and does not take into account your personal circumstances, needs or objectives. You should, before acting on this advice, consider the appropriateness of the advice, having regard to your objectives, financial situation and needs. If our advice relates to the acquisition, or possible acquisition, of a particular financial product you should read any relevant Product Disclosure Statement or like instrument.

New Zealand

The research in this document is intended for New Zealand resident professional financial advisers or brokers (for use in their roles as financial advisers or brokers) and habitual investors who are “wholesale clients” for the purpose of the Financial Advisers Act 2008 (FAA) (as described in sections 5(c) (1)(a), (b) and (c) of the FAA). This is not a solicitation or inducement to buy, sell, subscribe, or underwrite any securities mentioned or in the topic of this document. For the purpose of the FAA, the content of this report is of a general nature, is intended as a source of general information only and is not intended to constitute a recommendation or opinion in relation to acquiring or disposing (including refraining from acquiring or disposing) of securities. The distribution of this document is not a “personalised service” and, to the extent that it contains any financial advice, is intended only as a “class service” provided by Edison within the meaning of the FAA (i.e. without taking into account the particular financial situation or goals of any person). As such, it should not be relied upon in making an investment decision.

United Kingdom

This document is prepared and provided by Edison for information purposes only and should not be construed as an offer or solicitation for investment in any securities mentioned or in the topic of this document. A marketing communication under FCA Rules, this document has not been prepared in accordance with the legal requirements designed to promote the independence of investment research and is not subject to any prohibition on dealing ahead of the dissemination of investment research.

This Communication is being distributed in the United Kingdom and is directed only at (i) persons having professional experience in matters relating to investments, i.e. investment professionals within the meaning of Article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005, as amended (the "FPO") (ii) high net-worth companies, unincorporated associations or other bodies within the meaning of Article 49 of the FPO and (iii) persons to whom it is otherwise lawful to distribute it. The investment or investment activity to which this document relates is available only to such persons. It is not intended that this document be distributed or passed on, directly or indirectly, to any other class of persons and in any event and under no circumstances should persons of any other description rely on or act upon the contents of this document.

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United States

Edison relies upon the "publishers' exclusion" from the definition of investment adviser under Section 202(a)(11) of the Investment Advisers Act of 1940 and corresponding state securities laws. This report is a bona fide publication of general and regular circulation offering impersonal investment-related advice, not tailored to a specific investment portfolio or the needs of current and/or prospective subscribers. As such, Edison does not offer or provide personal advice and the research provided is for informational purposes only. No mention of a particular security in this report constitutes a recommendation to buy, sell or hold that or any security, or that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person.

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Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

1,185 Avenue of the Americas

3rd Floor, New York, NY 10036

United States of America

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

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