Norwegian niche banks 2Q15

Growth story better-than-expected 

Niche banks - 2Q 2015 Review - ROE to new peaks and continued growth in 2Q

Conclusion
More M&A likely but few signs of increased competition in margins yet
98% of yA Banks shareholders approved the sale to Swedish Resurs bank at the extraordinary general meeting on August 11th. Hence shareholders are expected to receive a NOK 55 liquidation dividend in October/November. On our post 2Q 15e estimates the offer imply a P/B of 3.0 and a P/E of 10. We view the offer as decent but our new post 2Q TP is NOK 70 indicate, although very theoretical now post acquisition, further upside. The “super profit” seen in the consumer segment will lure several new niche banks into entering the market but limited – if any - margin pressure is visible in the 2Q figures

Our analysis

Avg. ROE above 25% in 2Q
The niche banks meet our high expectations also in 2Q. 2Q15 surprised again on top-lone growth with total income 11% above our estimates. Net profit came in 8% above and average ROE was 27.7% in the quarter which was another step up from 1Q. With continued high lending growth in 2Q (9% QoQ or 41% annualized) and increased margin we see few signs of increased competition yet. In our scenario analysis we find the high ROE to be adequate in raising capital organically if lending growth stay at our projected levels.

• Consumer finance penetration likely to increase further but so is competition
Due to the penetration catch-up effect average annual consumer credit growth is ~400bp higher than overall credit growth. Although we see few signs of increased competition our “increased competition and lower margin” assumption remains our base case. On average we believe blended NII margin will drop 30-40 bp the next two years and that loan losses will rise 20-30 bp reflecting a more depressed macroeconomic picture in Norway.

• ROE to new peaks and M&A add fuel to valuation
Top-line growth combined with cost efficiency ensures high ROE also ahead and we see few clouds near-to-medium term for the niche banks. We expect the banks to deliver an avg. ROE in 15e of 26.3% and both yA Bank and Bank Norwegian delivered ROE well in excess of 30% in 2Q. We reiterate our BUY recommendation on all the niche banks.


FULL REPORT