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%.
UmweltBank |
Earnings momentum remains constrained |
FY19 preliminary results |
Banks |
4 March 2020 |
Share price performance
Business description
Next events
Analyst
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* |
P/E* |
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
|
|
Research: Metals & Mining
Since our last note, KEFI Minerals has achieved a number of key development milestones and prepared the TKGM consortium and its own balance sheet for: 1) triggering project development in January 2020 starting with government funded off-site works; 2) the full repayment and cancellation of all convertible loan facilities through a set of financings announced on 17 December 2019; and 3) receipt of all permits and internal government administrative requirements required to trigger offsite development. It has also selected a more attractive bank loan proposal to fund capex compared to the previous bond lease proposal, closed first project equity (from the government) and started development offsite. The next milestones for Tulu Kapi are the closing of private sector project equity and starting on-site development activities. On 17 February 2020, KEFI announced the approval of the TKGM shareholders for these two steps to now proceed to the next steps of closing.