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TLV
HOLD
Banking 1.74 1.77
Primary stock exchange Market Cap (RON) Free Float Shares Outstanding Avg Daily Volume Fitch Rating Reuters Code Bloomberg Code Exchange Rate (RON/EUR)
BSE 3,841,405,640 85% 2,206,436,324 277,670,041 BB- (stable outlook) ROTLV.BX TLV RO 4.4916
Investment Summary
Our analysis has resulted in a target price of RON 1.77/share, implying a very slight upside of 0.02% from the current level, leading us to argue that the stock is fairly valued, with the current price already incorporating the market perception of Banca Transilvania as a profitable investment and a company with strong fundamentals. The bank is trading in line with far more liquid banks in the region and will maintain its double-digit ROE growth in the following years, which supports our HOLD recommendation. A strong player in a changing environment A weak domestic demand, along with flat consumption and contracting investment have kept lending constant since the beginning of 2012, but credit to the economy is expected to grow steadily after NBRs measures taken in the first part of 2014 and once macroeconomic indicators will start to show solid improvement. Pressure on margins Interest income growth has only a limited potential on medium-term for Banca Transilvania, because of monetary policies and the competitive environment putting a pressure on net interest margin. Similarly, the steady trend of decreasing net fee and commission income due to shifts towards electronic banking requires a change in the bank strategy a focus on cross-selling and new developments in the industry. Avoiding asset quality concerns Due to its conservative policy of provisioning, BT has managed to retain a relative advantage concerning the quality of their assets, maintaining a stable and aboveaverage coverage ratio which could protect against new non-performing loans. Natural hedging Contributing to the quality of the banks balance sheet is the fact that BT has succeeded to preserve a sound funding, with a loans-to-deposits ratio of 75%, and two-thirds of its loans denominated in foreign currency, providing a protection against further NPL formation.
Revenues Year 2016E 2015E 2014E RON Mil Net Profit RON Mil EPS EPS growth PE BVPS PBV ROE
Feb-13 Mar-13
Apr-13 May-13
Nov-13 Dec-13
Jun-13 Jul-13
Aug-13
Sep-13 Oct-13
Jan-14
2013 2012
BET rebased
TLV rebased
II.Business Description
Banca Transilvania was founded in 1994, in Cluj-Napoca, by a group of local investors, with 79% Romanian capital and 21% foreign capital. Leaders of TLV identified opportunities for growth and started the expansion from the local to the national level. The headquarters of TLV are in Cluj-Napoca, not in Bucharest, in order to keep the regional feeling alive. The shareholder structure has changed over the past 20 years. The ratio of foreign capital to total capital now stands at 54.26 percent. Natural persons with Romanian capital hold approximately 21.15% of the capital and legal persons hold 24.59 percent. Only 2.27 percent of the capital is held by natural persons with foreign capital, while 51.99% of it is held by legal persons of foreign origin. The number of branches and agencies owned by TLV has risen over the past 20 years to 560. TLV employs 6,000 people, with an average age of 33 years. It represents one of the top employers in Romania, being sought after by most of the potential employees in the banking sector. The physical distribution of its network of branches is efficient, as they are present in every Romanian county. In the past few years, TLVs top management implemented an IT system which helps the business as the customers are now able to easily have access to each of the banks products. TLV is mainly focused on financing Romanian entrepreneurs. It is the third bank operating in Romania based on assets, at the end of 2013. Its mission is to support the development of the business environment, through products and services welladjusted to the needs of the local entrepreneurs. The most important values promoted by the bank are: Soul, Energy and New Ideas. While at the beginning, TLV was focused exclusively on SMEs, today it also finances the retail industry. TLV was the first bank in Romania to be listed on the Bucharest Stock Exchange, in 1997. The bank has some important shareholders that guide its expansion strategy: European Bank for Reconstruction and Development (14.6%), Bank of Cyprus (10%), SIF Moldova (5%) and Investment Division of World Bank. In 2003, TLV underwent a rebranding process, which consisted of the change of the banks logo and also the implementation of new standards for its branches, while maintaining a competitive, professional team. The four business directions of BT are: retail, SMEs, corporate and medical doctors division. For each of these segments, the bank has formed specialized management teams and a complex portfolio of banking products and services. In May 2013 the shareholders appointed a new CEO Omer Tetik. Aged 40, he was previously the president of Credit Europe Bank and was considered suitable for the job at TLV thanks to his past vision in management positions and also his wide experience.
20 February 2014
Source: Eurostat
20 February 2014
From a structural point of view, 2012 and 2013 did not bring significant
Source: BNR
changes at shareholder level. Concerning the market share, first places are occupied by the subsidiaries of Austrian, French and Greek banks. In the context of extended uncertainty manifested in Europe at the macroeconomic level, the deleveraging process continued. Although unavoidable, the amplitude and the speed with which this process is developing threaten the banking systems stability. During 2013, the positive dynamics of the deposits attracted from residents has attenuated substantially. The main developments in this area reflect: accentuated decreases of the interest rates for RON and foreign currency deposits, both for companies and for the rest of the population, diminishing sums available for savings due to the high level of indebtedness and the statistical effect of the seasonal growth of inflation. Porters Five Forces Model indicates that there are opportunities that TLV could exploit in all segments, especially thanks to low threat of new substitutes or new entrants. The only problem observed by the model is the high rivalry between TLV and its competitors in search of new customers.
20 February 2014
IV.Valuation
Banca Transilvanias share price has increased by 38.3% in the last year (in RON terms and 33.6% in EUR), outperforming the Romanian BET Index by 23% and the other European Banks by 21.75% (local currency) and 21% in EUR terms.
Its share price performance is justified fundamentally by the banks improving profitability, having a ROE above its regional peers, while the PBV discount has remained constant. Furthermore, if we analyse the PBV average in Eastern Europe without including Raiffeisen Bank Intl. which is at outlier (its PBV surpassed 21 in 2014, while the maximum value for all the other banks taken into consideration during the whole period was under 2.5) we can see that Transilvanias PBV is very close to the average of the region. 2 1.5 1
Figure11 PBV Comparison TLV, BRD, Avg EE (without Raiffeisen Bank Intl.)
For setting our target price of RON 1.77 per share we used a 50: 50 blend of two valuation methods: discounted cash flow model and peer group valuation. Figure 12 :CAPM model inputs and result RFR ERP RE 4.73% 1.1379 8.12% 13.97% Our main assumptions used in the CAPM model to infer the cost of equity are displayed in both table 12 and table 13. We base our risk-free rate assumption on the yield on 5-year government bonds as a proxy variable. Drawbacks that arose in the process of estimating equity risk premium include the lack of reliability on a short history of the equity market in Romania, high volatilities of returns and illiquidity. The beta of 1.1379 translated into a 13.97% cost of equity. After applying an estimation of the cost of debt from the current structure of long-term debt in terms of maturity and currency, we have come to a WACC estimation of 10%.
Sources: Teams estimates, the Minister of Public Finance, Thomson Reuters Datatstream
We have taken a more conservative position than current market forecasts and opted in our model for more moderate growth prospects than what BT has displayed in recent years (a 7% yoy loan growth and 5% yoy deposit growth) in line with the potential evolution of NBR reference interest rate, which suggests the recovery of lending at the expense of saving. Our 4% assumption for the terminal growth rate is situated slightly above the forecasted rate of nominal growth for Romanias GDP. Our model is based on the assumption that all cash flows to the company occur throughout the year making it necessary to discount them on a middle-of-year basis. Operational streamlining is expected to produce very slight reduction of operating expenses in the following 4-year period. In the modelling of interest income, we integrated in our analysis the forecasted levels of ROBOR, EURIBOR and LIBOR interest rates for the period taken into account, which are foreseen to marginally increase up to the end of 2017. In terms of provisioning practices our model accounts for comfortable levels to cover subsequent loan losses relative to BTs prior performance in this area in recent years.
We expect that BT will continue their policy of incorporating their retained earnings into equity and offering stock dividends to fund growth and maintain capital adequacy, although this can be detrimental to ROE growth if net income growth will eventually slow down. Sensitivity analysis The variation in target price as a function of WACC and growth rate is illustrated in the table x. The upside/downside potential range is situated between -7.92% and 8.56%, displaying moderate volatility. 1.82 8.00% 9.00% 10.00% 11.00% 12.00% 2.50% 1.98 1.90 1.82 1.75 1.68 3.00% 1.98 1.90 1.82 1.75 1.68 3.50% 1.98 1.90 1.82 1.75 1.68 4.00% 1.98 1.90 1.82 1.75 1.68 4.50% 1.98 1.90 1.82 1.75 1.68 5.00% 1.98 1.90 1.82 1.75 1.68
Source: Teams estimates Our estimates lead us to higher leverage ratios in the period 2013-2017 (an approximate CAGR of 4.71%), which will equip the bank with the ability to absorb loan losses. Even at the current moment, a leverage ratio of 9.61% is comfortable above the NBR minimum requirement of 3%. In September 2013, capital adequacy ratio was situated at 12.4%, above the minimum requirement level of NBR, but under the national banking industry level of 13.92%. Relative Valuation When looking at the PE, PBV, ROE levels from the Eastern European perspective (the Czech, Hungarian, Polish, Russian and Austrian banks) we see that the discount has reduced significantly. We compare the stock by using both the median and the average. The stock is trading at a 8.93% on 2013 2015 PBVs and at a 27.7% discount to PE for the same period. These discount levels are drastically lower to the banks past three-year average (27% on PBV and 34.6% (median) on PE). Since the banks return on equity is actually superior to its regional peers (7.83% premium when compared to the median and 21.6% premium when compared to the average), we consider that a lower discount level should be applied in determining the fair value.
PE -27.7% PBV -2.83% ROE 7.83% Source: Thomson Reuters Teams Analysis
20 February 2014
To start with, we believe that the bank should trade at a discount, due to the low liquidity (the stock is trading only around EUR 0.35m per day, according to the volume traded in the last 52 weeks) and due a possible overhang as some of its main shareholders, such as the SIF s , could be looking for short-term gains. However, in order to determine the fair value, based on peer group multiples, we have applied a discount of 15% for PE (half of the average of the discounts in the last three years and the discounts from the 2013-2015E) and no Figure 17: NIM discount for the PBV multiple based on the high difference from the discount for the past three years and the values obtained for 2013-2015E. Applying these discounts implies a fair value of RON 1.73 per share (using a 50:50 split of the PE and PBV multiples), or a 0.35% decrease from the current level. To accommodate various scenarios, we have run a sensitivity analysis for different discounts applied to the PBV and PE. Even if the stock were to trade on par with its Eastern European peers (including the Polish Banks), it would not offer more than 6.54% upside from the current level
Source:BT Financial Statements, Teams Estimates
5.00% 10.00 % PER - 1.77745 15.00 8 % - 1.75166 20.00 6 % - 1.72587 25.00 4 % - 1.70008 30.00 2 % Source: Teams Analysis
V. Financial Analysis
We have analysed the banks profitability perspective, liquidity, solvency and efficiency by looking at financial ratios. Profitability Perspective Banca Transilvania was characterized by a strong profitability for 2013, as the operational profit has an increase of 27.4% yoy, reaching 850.52 million RON (provisions excluded). In addition, 4Q 2013 has brought a 33%qoq increase of the operating income. A faster growing total income together with slowly increasing operational costs have resulted in a falling cost-to-income ratio in 2013 of 48% (as opposed to the previous 51.8% in 2012). Net trading income had an increasing trend over the past two years, but this years other income was decreasing with -4.3% due to the contribution in Deposits guarantee fund, which offset the trend. Leveraging Our estimates lead us to higher leverage ratios in the period 2013-2017 (an approximate CAGR of 4.71%), which will equip the bank with the ability to absorb
Statements,
20 February 2014
loan losses. Even at the current moment, a leverage ratio of 9.61% is comfortable above the NBR minimum requirement of 3%.
After the loan percentage declined qoq in Q1 2013, loan growth has increased over the past quarters, reaching an almost 4% in the last quarter of the year. On the deposit side, Q2 and Q3 2013 were described by a rather moderate growth qoq, only to boost at a 5.7% qoq for the last quarter of the year. Effective tax rate Effective tax rate has fallen to 15.10% for the 4Q 2013 from 20.02% mainly due to the provision cut in the same quarter. Further on, remaining cautious is preferable, therefore the effective tax rate should stay at the normal-tax level of 16%.
NIM NIM has been steadily increasing over the past year, closing at 5.008% in 4Q 2013, due to an increase in NII of 30.7 % qoq. The main pressure on NIM comes from the asset yield, which closes at 7.69% Q4 2013. The NIM is anticipated to further decrease due to the NBR decision in the first trimester of 2014 to reduce the policy rate to a historical minimum of 3.5%. NIM/total assets is anticipated to stabilize until 2016 close to 3%. Cost/income & Cost/assets ratio Total cost has followed a decreasing trend since until 2013 due to continuously falling interest expenses. Cost/income ratio finished 2013 at 48%, 3% lower than 2012, whereas the cost/assets ratio remained stagnant at 2.50%. As income is estimated to decrease over the following 3 years, the cost/income ratio is anticipated to reach 70% in 2016, according to our estimates. NPL Transilvanias 13.22% stated NPL PAR 90+ ratio in Q3 2013 better positions the bank in terms of credit risk in comparison with the average NPL PAR 90+ ratio on the Romanian banking sector in 2013 , which is 20,33% as reported by NBR. In terms of NPL 60+ performance, the bank did not disclose publicly any figures for the past period. NBRs current decision of gradually lowering the monetary policy rate to reach 3.5% as well as the reduction of the reserve requirements from 15% to 12% in the first trimester of 2014 are measures expected to reduce the costs of credit and stimulate crediting. In the discussions with the bank, we have learnt that the money coming from the reduction of the reserve requirement will be invested on short term in T-bills and further on, in crediting. Provisioning An increase in provisions in 2014 is debatable due to continuing restructuring process. In Q3 2013 there has been an increase of 8.7% in provisions qoq and an increase of 6% yoy as compared to 2012, these increases comprising the effects of prudential filters imposed by the NBR. As regards to the prudential filters, they will be gradually diminished between 2014 and 2018 in the context of implementing Basel III. Solvency Banca Transilvanias solvency ratio stays at a comfortable level of 12,4% at the end of rd the 3 quarter of 2013, lower than the average level of the banking system of 14,6%, but still denoting solid funding. The bank needs to emphasize furthermore on acquiring its own funding in order to strengthen its solvability ratio, as in the case of April and May 2013 when it issued a tranche of 30 million EUR valued bonds convertible into shares.
Source:
BT
Financial
Statements
20 February 2014
VI. Investment Risk Credit risk Banca Transilvanias two big state-owned companies included in its loan portfolio have been opposed to certain credit risks in the past two years. Positively, Hidroelectrica s insolvency issue was solved once the company exited insolvency procedures in June 2013, thus, no longer posing a serious default risk. The event had reversed provisions as an effect, afferent of the loan exposure of 120 million RON, and it was reflected in the 13.69% decrease in provisions at the end of Q2 2013. On a slight negative side, Oltchims insolvency affects furthermore the bank as it waits for the company to be successfully privatized in order to reverse the provisions that cover the loan exposure of 165 million RON. Liquidity risk In 2013, the banking sector faced a comfortable liquidity position while the systemic risk remained low, according to NBR. BTs liquidity is good, with the loan/term deposits and long-term financing ratios below 70%. The group attempts to diversify its funding, thereby contracting debts with different ranges of maturities and in different currencies while it assesses the liquidity risk through its monitoring of the changes in funding, as well as through diversification. Taxation risk Differences in accounting treatment and the IFRS implementation in 2012 have subjected the bank to taxation risk. In this situation, careful analysis was performed to identify differences in accounting treatment which impact the bank from a taxation perspective. Romanias obligations as a member of the EU are expected to further change the taxation framework. MARKET RISKS Interest rate risk The banks non-trading portfolios are exposed mainly to loss from fluctuations in the future cash flows because of a change in market interest rates. Based on the sensitivity 1 analysis performed by the Group , it is observable that the impact over the Groups profit is limited. The highest impact is recorded for the fluctuations in the interest rate for the interval of 6 to 12 months, fact that gives the bank sufficient time to adjust to the changes in the financial market. The Group is less affected by the interest risk that comes from instruments denominated in local currency, due to the fact that the majority of the assets and liabilities carry variable interest rates. Currency risk The Group has exposure to currency risk through transactions in foreign currencies against RON that are protected against loss through stop -loss and limit orders. Another exposure to currency risk comes from the different currencies of the assets and liabilities on the balance sheet. Given that the NPL PAR 90+ volume in foreign currencies on the banking sector has increased with 73% between 2011 and 2013 (as opposed to 53% in the case of the same category in RON), the bank stays hedged against currency risk by maintaining of its assets denominated in local currency. Risks related to the business environment One of the main challenges of Romanian economy is slow economic growth, and that will be reflected implicitly in the banking sector. GDP forecasts for 2014 a 0.1% slowed down growth by comparison with 2013, registering a downfall from 2.2%. 2013 registered a 1.8% yoy increase of the GDP growth rate which was due mainly to the effect of the robust automotive industry. A better absorption of EU funds could boost investment as major infrastructure projects are ready to be implemented. The budget deficit as percentage of GDP is expected to contract in the following years, whereas the current account deficit expectations widen. NBR pinpoints the inflationary target of 2.5% in 2014, as falling food prices are anticipated to bring down the inflation to a historical minimum. All the factors mentioned above consequently drive the economic trajectory of the bank. The management of the Group focuses, among others, on providing sustainability and growth to the bank through a better control of costs, efficiency maximization and improvement of the risk management framework.
20 February 2014
Year RON million Interest income Interest expense Net interest income Fee and commission income Fee and commission expense Net fee and commission income Net trading income Contribution, Deposits Guarantee Fund Other operating income Operating income Net impairment allowance on financial assets, other liabilities and loan commitments Personnel expenses Depreciation and amortization Other operating expenses Operating expenses Share of profits in associates Profit from sale of associates and joint ventures Profit before income tax Income tax expense Profit for the year Profit for the year attributable to: Equity holders of the Bank Non-controlling interests Profit for the year Earnings per share Basic earnings per share Diluted earnings per share
2010
2011
2012
2013
2014E
2015E
2016E
2017E
52 1,542
62 1,490
86 1,640
(647) (316) (373) (390) (61) (64) (307) (364) (1,388) (1,134) 5 0 159 (25) 134 0 0 355 (58) 297
134 0 134
297 0 297
0.0801 0.0801
0.1840 0.1840
0.1850 0.1850
0.1699
0.1773
0.2015
0.2069
0.2117
11
6,530
8,936
290 80
289 83
21,730
26,009
142 74 78 29,572
145 74 92 32,066
33,611
35,379
37,269
39,243
12
According to the Global Competitiveness Index, Romania is situated in the second stage of development and is efficiency-driven. The value of GCI for Romania is 4.13 out of a maximum of 7, and it places it on the 76th place worldwide, out of 148 analyzed countries. Romania is one of the EU countries with a large gap in regional competitiveness, according to the World Economic Forum. This problem is also encountered in Western countries, such as France or Italy. The gap between regions of a member state, or, in Romanias case, between the capital region and the second most competitive region is very wide, which heavily affects the entire national competitiveness. A healthy Cohesion Policy may be the solution to this problem and it may bring more similar levels of regional competitiveness, while also boosting it at a national level.
40-60
60-80 >80 0 20 40 60 80
Romania ranks 69t out of 177 countries in terms of transparency, with a quotient of 43, as Transparency Internationals study reveals. Romania is ahead of two other EU countries in this ranking: Bulgaria and Greece, and also, is classified as less corrupt than the BRICS countries. 13
NPL in Romania
23 22 21 20 19 18 17 16
Dec-12 Mar-13 May-13 Aug-13 Nov-13 Dec-13 Apr-13 Jun-13 Feb-13 Sep-13 Oct-13 Jan-13 Jul-13
NPL Romania
Source: NBR
20.0
15.0 10.0 5.0 0.0 2008 2009 2010 2011 2012 2013
40.0
Bulgaria
14
Romania
15
15.00%
10.00%
Dec-12 Q1 2013
5.00%
0.00%
16
Investments 28%
5%
7% 4% 29%
Manufacturing and Mining Construction Transport, Communication and Services Chemical Industry
12%
9%
28% FI Others Source: Banca Transilvania
17
By Industry
By type
Other short term 8%
Investments 48%
18
By Type
19
Concentrated market top 10 banks own around 78% of total assets, top 3 banks own around 42%; In the last 10 years only 4 new banks entered the market, none of them achieving a top position in Romania (not in the top ten banks by total assets); Little incentive for foreign banks to enter the Romanian market, at least for the next couple of years, due to the banking systems negative outlook and weak profitability according to a recent report by Fitch Ratings;
Threat of Low Substitutes - alternative banking services, such as leasing for big ticket items electronics, cars; nevertheless, these services cover a very small category of goods;
Low - SMEs do not have the financial power to take advantage of other means of financing through debt (such as bonds);
Low to Moderate - issuing bonds is an alternative to long term loans for financing, but it is little used in Romania;
Low only Banca Transilvania and a few other banks, such as Libra Bank and Nextebank, offer special services for healthcare professionals; generally this division is included in the retail category so the arguments that hold for retail are also valid here ; Low - high number of buyers in relation to the small number of banks that offer specialized services for them; Low - regarding their position as suppliers of funds, they are included in the retail category as there makes no sense to 20
Bargaining Low Power of - high number of Buyers customers with little influence over the banks offerings;
Moderate to High - large sums of money are involved and corporations are offered personalized services;
Bargaining Low Low to Moderate Power of - do not influence - the bargaining Suppliers the interest rates; power increases with the amount of funds supplied to the bank?
Moderate to High - corporations tend to have accounts in the same banks that offer them loans; they are both supplier and buyer and that increases their
The Bucharest University of Economic Studies bargaining power in see healthcare both positions; professionals as a - in the corporations separate category; category we can include other financial institutions that offer loans to banks ; Moderate to High - low market growth; - less banks that specifically target SMEs or offer products tailored for them; High - high number of competitors that offer similar products; - low market growth; Moderate - low market growth; few banks consider this division as a separate category; most banks include it in their retail customers;
High - high number of competitors that offer similar products; low market growth;
21
Source: World Bank, IMF ( Financial Soundness Indicators), Banca Transilvania, Ernst&Young, Teams Analysis
To compute Transilvanias NPLs for the next three years we took into consideration the NPLs in the Eurozone in the period 2009 - 2013. We chose the Eurozone instead of Central and Eastern Europe because each analyst tends to define CEE differently while the Eurozone is defined in the same way in different reports so we considered it to be a suitable benchmark for Romanias NPLs. In 2009 Romanias NPLs were 171% of the NPLs in the Eurozone, percentage that grew to 281% by 2013. We assumed a safe, albeit rather optimistic, constant percentage of 300% for 2014-2016 and computed Romanias NPLs by using this figure and forecasts for Eurozone NPLs for the next three years from Ernst&Youngs Eurozone Forecast - Outlook for Financial Services (Spring Edition 2013)1 Romanias NPL = Eurozone NPL x 3 In the 2009-2013 period Transilvanias NPLs were in the range of 60.14% - 62.18% out of Romanias NPL so we assumed this trend will continue in the next years as well and computed the forecast as 0.6xRomania NPL. Banca Transilvanias NPL= 0.6 x Romania NPL Banca Transilvanias NPL = 0.6 x 3 x Eurozone NPL
http://www.amcham.ro/UserFiles/articleFiles/FS%20Eurozone%20-%20Spring%202013_LR_04091727.pdf
22
Appendix 14 :PBV Comparison TLV, BRD, Average Eastern Europe (Including Raiffeissen Bank Intl.)
3 2.5 2
1.5
1 0.5 0 Jan-11 Jan-12 Jan-13
Nov-11
Nov-12
May-11
May-12
May-13
Nov-13
Mar-11
Mar-12
Mar-13
Sep-11
Sep-12
Sep-13
Jan-14
Jul-12
Jul-11
Jul-13
23
Valuation of FCFs and terminal value Equity beta Risk-free rate Market risk premium Cost of equity, rE Cost of debt, rD
Current market value/share 0.0000017 0.0000017 Number of shares 2,206,436,000 2,206,436,000 Equity value 3,817.13 3,817.13 Debt value 2,405.17 2,405.17 Percentage of equity in capital structure 61.35% 61.35% Percentage of debt in capital structure 38.65% 38.65% Tax rate 16.00% 16.00% Discount rate, WACC Terminal growth rate of FCF 10.47% 4.00% 2014 828.80 828.80 10.00% 4.00% 2015 760.68 760.68 2016 758.03 758.03 2017 571.60 5,544.38 6,115.98
Free Cash Flow Terminal value Total Value of BT Long-term debt Implied equity value Number of shares Imputed per-share value of BT
Source: Teams Estimates, Banca Transilvania
6,352 6,427 2,405.17 2,405.17 3,946.47 4,022.18 2206436000 2,206,436,000 1.7886 1.8229
24
NAME BANCA TRANSILVANIA CLUJ BRD GROUPE SOCIETE GL. KOMERCNI BANKA, A.S. OTP BANK NYRT ING BANK SLASKI SA BANK BPH S.A. BANK HANDLOWY BANK MILLENNIUM SA BANK ZACHODNI WBK SA MBANK GETIN HOLDING SA BANK PEKAO S.A. BANK SANKT-PETERBURG BANK VOZROZHDENIE JSC VTB BANK ERSTE GROUP BANK AG RAIFFEISEN BANK MEDIAN Non Polish TLV VERSUS PEERS
Market Cap EUR millions 834 1364 6007 3745 3668 1001 3175 2438 8476 4989 692 11320 350 223 12288 11346 8291
P/E 2013E 8.2 12.9 10.7 17.3 13.6 15.4 12.7 11.7 13 10.9 15.8 13.7 15.8 6.8 7.9 11.3 5.6 12.7 10.7 -35.43% 2014E 10.8 29.7 13.1 9.1 16.9 30.5 13.7 16.5 16.6 18.4 12.9 17.8 3.5 7.4 5 20.3 14.4 14.4 10.8 -25.00% 2015E 9.9 14.4 12.8 8 15.8 19.9 15.3 14.4 13.9 16.5 10.3 16.7 3.1 4 4.1 11.5 9.8 12.8 9.8 -22.66% 2013 E 0.97 1.12 1.46 0.83 1.44 0.81 1.62 1.14 2.12 1.37 1.06 1.75 0.5 0.76 0.83 0.79 0.78 1.06 0.83 -8.49%
P/BV 2014E 1.23 1.06 1.76 0.71 1.75 0.86 1.80 1.82 2.27 2.06 1.42 2.02 0.35 0.49 0.68 0.95 0.73 1.23 0.73 0.00% 2015E 1.14 0.99 1.69 0.67 1.65 0.82 1.81 1.72 2.09 1.92 1.22 1.98 0.32 0.43 0.62 0.90 0.73 1.14 0.73 0.00% 2013 E 13.21 -5.08 15.80 10.20 11.70 5.67 15.50 10.78 17.42 13.57 12.97 13.52 3.25 11.87 13.70 3.88 7.27 11.87 10.20 11.30%
ROE 2014E 11.91 3.07 12.96 8.04 10.27 4.00 13.30 10.78 14.06 11.50 11.60 11.49 9.83 6.37 10.66 3.59 4.85 10.66 8.04 11.68% 2015E 11.66 7.09 13.27 8.73 10.13 5.00 11.60 11.84 15.40 11.96 14.30 12.01 11.17 10.93 12.35 7.64 7.31 11.60 10.93 0.51%
25
Transilvania: PE valuation Net income (RON m) Peer group average multiple Retained multiple Implied premium/discount Equity value (RON m) Equity value (RON per share) Average (RON per share)
Transilvania: PBV valuation Book value (RON m) Peer group average multiple Retained multiple Implied premium/discount Equity value (RON m) Equity value (RON per share) Average (RON per share)
26
12
10 8 6 4
BANK SANKT-PETERBURG OTP BANK NYRT BANK VOZROZHDENIE RAIFFEISEN BANK
BANK BPH S.A. ERSTE GROUP BANK AG BRD GROUPE SOCIETE GL.
2
0 0 0.5 1 1.5 2 2.5
The ROE and PBV comparison shows that Banca Transilvania is one of the cheapest and most profitable banks in Eastern Europe overall, trading at 1.23x PBV and a 11.9% ROE, on consensus estimates. Both JSC VTB Bank and Bank Sankt-Peterburg are much cheaper, trading at a ROE of around 10%, with a PBV of 0.68, respectively 0.34. While both Russian banks have a stable outlook according to the latest ratings by Fitch Ratings and ratings similar to Banca Transilvanias on the long term (Banca Transilvania BB, JSC VTB Bank BBB-, Bank Sankt-Peterburg BB) the opposite evolution trends of the PBV in the last three years for the three banks show that while investors are confident about Banca Transilvanias growth and prospects, they feel the opposite way about the its Russian counterparts. Getin Holding trades at a ROE and PBV close in value to Banca Transilvania, but also has the upside of being more liquid and therefore possibly a better choice that it.
PBV evolution
2 1.5 PBV 1 0.5 0
27
100.0%
84.5%
80.0% 60.0% 40.0% 20.0% 0.0% -20.0% -40.0% -60.0% Source: Thomson Reuters Datastream
53.0% 52.3%
49.2% 33.9% 33.6% 14.5% 14.0% 13.9% 11.3% 8.8% 8.4% -3.3% -8.1%-14.8% -28.5% -36.8%-38.1%
10.00%
5.00%
Return (%)
0.00%
BT
-5.00%
BET
-10.00%
-15.00%
28
24.47%
14.61%
International Finance Corporation
9.98%
Romanian individuals
3.53%
Romanian companies Foreign individuals Foreign companies
29
million RON
1Q 2012
2Q 2012
235.9 238.6 NII Net F&C 98.5 106.8 result Total Other 58.9 33.5 income Total 379.9 365.4 Income Total -200.9 -213.7 costs Operating 179.0 151.7 profit Source: BT Financial Statements
Financial ratios Loan Growth qoq Deposit growth qoq NIM Cost/Income ratio Loan/deposits ratio Cost of risk Effective tax rate Return on avg Equity Asset yield
1Q12
2Q12
3Q12
4Q12
1Q13
2Q13
3Q13
4Q13
17.70% 31.86% 3.40% 49.35% 60.7% 2.24% 15.38% 14.13% 7.13% 2.704%
14.91% 20.22% 3.44% 49.77% 67.0% 2.64% -3.64% 13.52% 7.33% 2.623%
12.91% 18.84% 3.38% 51.65% 67.2% 2.62% -5.16% 13.21% 7.28% 2.771%
10.13% 13.38% 3.31% 56.48% 66.4% 2.51% 16.58% 8.47% 7.30% 2.988%
6.68% 2.04% 3.28% 50.65% 63.5% 1.89% 15.93% 11.44% 6.50% 2.566%
3.42% 8.80% 3.49% 53.72% 63.6% 1.63% 12.14% 12.99% 6.72% 2.874%
3.45% 7.11% 3.83% 48.19% 64.9% 3.48% 20.02% 8.15% 6.48% 2.834%
7.83% 12.65% 5.01% 44.20% 63.6% 3.16% 15.10% 18.26% 7.69% 3.210%
30
Banca Transilvania: Financial Ratios Total income/earning assets Interest expense/intbearing liabilities NIM on total assets Cost/income ratio Cost/assets ratio Provisions/net interest income Provisions/Avg. customer loans NPLs/ loans Provisions/NPLs Cost of risk ROE ROA Customer loans/assets Customer deposits/ assets Loans/deposits Equity/ assets Valuation Multiples EPS DPS BVPS P/E
2008
2009
2010
2011
2012
2013E
2014E
2015E
2016E
6.54%
6.89%
7.25%
5.85%
5.11%
5.26%
5.19%
5.21%
5.09%
6.25% 3.46% 82.92% 5.25% 26.58% 1.45% 4.00% 36.19% 1.45% 21.73% 2.10% 63.47% 70.54% 89.98% 9.66%
7.67% 3.85% 91.73% 6.16% 65.06% 4.27% 4.80% 89.05% 4.27% 7.44% 0.70% 58.54% 76.42% 76.60% 9.37%
4.09% 3.28% 51.81% 2.60% 39.69% 2.49% 11.31% 21.99% 2.49% 12.86% 1.17% 52.27% 78.56% 66.53% 9.11%
3.14% 3.72% 48.74% 2.52% 34.12% 2.44% 12.57% 19.44% 2.44% 12.16% 1.17% 51.98% 80.47% 64.59% 9.61%
2.34% 3.44% 72.88% 3.72% 44.79% 2.80% 10.08% 28.79% 2.80% 1190.80% 1.16% 53.06% 80.61% 65.82% 10.29%
2.35% 3.48% 70.88% 3.64% 44.95% 2.80% 8.28% 35.05% 2.80% 1166.20% 1.26% 53.94% 80.41% 67.08% 10.88%
2.53% 3.37% 70.94% 3.56% 47.13% 5.80% 7.02% 41.34% 5.80% 1169.30% 1.22% 54.79% 80.15% 68.35% 11.52%
64.9%4%% 33.80% 5.30% 7.40% 71.57% 5.30% 6.41% 0.62% 56.22% 79.52% 70.70% 9.62% 2.26% 8.60% 26.28% 2.26% 12.43% 1.14% 53.74% 77.89% 69.00% 9.20%
0.20
0.07 0.00
1.46 6.14
1.32 12.12
P/BV 1.60 1.27 0.84 0.67 0.87 0.97 Source: BT Financial Statements, Thomson Reuters Datastream, Teams estimates
31
Weaknesses
The new IT system which permits Facebook payments and represent an easier way to communicate with the bank also poses a new risk for the clients because of the potential internet frauds which threatens the security of their accounts Horia Ciorcil, the president of BTs Administration Council has been trialed for capital market manipulation for the transaction through which Bank of Cyprus bought BT shares. Although acquitted, BTs image at local level has suffered Uncertainty concerning the policy of acquisitions of BT Naming a new CEO, Omer Tetik, BT is undergoing a process of change and, therefore, the uncertainty concerning the future policies of the bank is high Low liquidity on the stock market; despite it is one of the most liquid companies listed at BVB, BT is still far behind regional peers Solvency ratio is under the Romanian banking system medium, while still being above the minimum level specified by BT Provisions are at a very high level Compared to regional peers, BT is perceiving high commissions for its services
Opportunities
Stable banking sector- solvability rate 14.7% mid-2013, well over 8% medium imposed by NBR NPLs are covered by provisions, highest rate in the region89.5% August 2013; which means there is little risk of major problems for banks that can damage the general performance of local peers, including BT NBR stimulates bank credit through the decrease of the reserve requirements for RON to 12% and to 18% for other currencies in January 2014 NBR diminished monetary policy rate to a historical minimum of only 3.75% The population of Romania is around 20 million inhabitants, which makes it one of the greatest markets in the region NBR assures major Romanian financial institutions liquidity by weekly repo operations Populations indebtedness is slowly diminishing, which means there are new opportunities for credit growth Small contagion risk Investors aversion decreased gradually during 2013, leading to the drop of interbank rates Country risk is diminishing slightly in Romania after the last economic developments, especially due to a lower budget deficit, encouraging foreign investments
Threats
High level of NPLs nationwide determines NBR to tighten its policies, affecting healthier banks such as BT Romania has a low small level of European funds absorption Romanian GDP has a evolution under the level of potential GDP Low level of innovation in the economy as a whole Heterogenuous performance of Romanian companies in 2012 and 2013 and the high number of insolvencies spread danger through the banking system Low global GDP growth; it is under expectations Low economic growth of Romanias trade partners discourages Romanian companies BT is forced to decrease its internet margin due to the regional process
32
Disclosures:
Ownership and material conflicts of interest: The author(s), or a member of their household, of this report does not hold a financial interest in the securities of this company. The author(s), or a member of their household, of this report does not know of the existence of any conflicts of interest that might bias the content or publication of this report. Receipt of compensation: Compensation of the author(s) of this report is not based on investment banking revenue. Position as a officer or director: The author(s), or a member of their household, does not serve as an officer, director or advisory board member of the subject company. Market making: The author(s) does not act as a market maker in the subject companys securities. Disclaimer: The information set forth herein has been obtained or derived from sources generally available to the public and believed by the author(s) to be reliable, but the author(s) does not make any representation or warranty, express or implied, as to its accuracy or completeness. The information is not intended to be used as the basis of any investment decisions by any person or entity. This information does not constitute investment advice, nor is it an offer or a solicitation of an offer to buy or sell any security. This report should not be considered to be a recommendation by any individual affiliated with Banca Transilvania, CFA Institute or the CFA Institute Research Challenge with regard to this companys stock.