Gronlandsbanken AB (ISIN DK0010230630) – Sleepy eskimo bank or moat company with natural resource option ?

Sometimes the only reason why I research a stock is because I find it interesting for some reason, not because it will be a good investment or so.

Gronlandsbanken AB is such a stock. Although it showed up in my Top 25 Scandinavian stocks, normally I would discard that because it is a bank. With Gronlandbanken however, the fact that this is the only listed stock of a company from Greenland got me interested.

Before looking into the bank, a few facts about Greenland from Wikipedia:

– Greenland has arond 60 tsd inhabitants spread over 2 mn square kilometers, however only 400 k square kilomoters are not permanent ice (Germany has ~350 k Square kilometers)

– politically, Greenland is mostly independent since 1979, however strong ties to its former “Colonial master” Denmark remain, among others the offical currency which is the Danish Krone
total GDP is estimated to be around ~2 bn USD
– However, basically 50% of the countries GDP are transfer payments from Denmark
– Greenland left the EU in the 80ties but still enjoys free trade and other preferred treatments via Denmark
– most people basically work for the Government, the second largest sector is fishing
– Last but not least, Greenland could become one of the prime beneficiaries of climate change, as its vast natural resources could become much easier to access

The Bank:

Grondlandsbanken has been founded in 1967. In 1997 it merged with the only other bank in Greenland, Nuna Bank and is therefore the only bank based in Greenland. However it doesn’t seem to be the only bank with branches in Greenland as this post shows:

Banking
There are 2 banks in Nuuk, Greenland Bank and BankNordik. However, the latter has no cash function. There are ATMs in both banks in Nuuk, and cash in advance and Visa Card can be used in all stores and the like.

Anyway, it looks like competition is currently quite limited in Greenland in the banking sector.

Gronlandsbanken valuation looks Ok, but not very exciting:

Market cap: 830 mn DKK (~110 mn EUR)
P/E Trailing ~14
P/B 1.0
Dividend yield 6.5%

Around 65% of the shares are held by large shareholders, among them with 14% the Government of Greenland. So “free float” is around 30-35% or 35-40 mn EUR only.

Interestingly, value shop Sparinvest has a 0.44% stake . Another value fund which I didn’t encounter yet, Nielsen Global Value holds 5% as well. For them it seems to be a quite significant position with 5% portfolio weight according to the latest fact sheet.

Thankfully, no sell-side analyst has discovered the stock yet.

The stock is up 56% YTD, however this is still less then 50% of the peak price back in 2007:

Not surprisingly, the stock has a very low beta of ~0.55 vs. the Danish stock index.

But why buy a bank at book value if you can get banks for 0.3 times book ?

Well, there are a few things which are “not normal”:

– Gronlandsbanken has an equity ratio of 17.3% (that’s right, not Tier 1 ratio or such crap)

– their net interest margin is around 4%-5%, Return on assets is around 1.7% If we compare this to the most profitable banks like HSBC (1.9% – 0.6% and Standard Chartered (2.4% and 0.9%) or DNB (1.4% -0.6%), we can see that Gronlandsbanken is at least twice as profitable as the most profitable European bank.

Due to the high ratio of equity, ROEs do not look spectacular, but still my model calculates ~15-16% total ROE with a relatively low volatility. According to my model, the fair value for such a company should be around 1.3 times higher than the current market price.

Especially interesting for me was the 2011 annual report from Gronlandsbanken.

The pages 8-16 are definitely the best summary of the economic situation in Greenland I have been able to find. Most interesting was the following passage:

Greenland at a Cross-Road
Looking forward the economy of Greenland will come to a cross-road because most likely the economy will follow one of the following paths:
1. If one or more of the major projects are built, enormous pressure will be exerted on the economy of Greenland with concurrent high rates of growth and pressure on inflation. Based on current analyses, a great deal of the required labour force will be from abroad.
2. If none of these major projects is built, the major challenge in Greenland will be to create jobs and to ensure economic growth.
Within a few years, we can be expecting either very high rates of growth or zero-growth, or perhaps even negative growth. On the other hand, it is harder to imagine a middle-of-the-road scenario with reasonable and sustainable rates of growth since there are few growth-drivers in the economy (except for metals and minerals).

So this is fundamentally a very interesting “Binary” situation with a clear “trigger”.

Some of those “projects” mentioned are relatively interesting as well:

– Oil: Uk Cairn Plc seems to have drilled for oil but has found nothing yet
– a public listed company called London Mining Plc is trying to develop a large iron ore mine
– ALCOA seems to be interested in building a large Aluminium plant
– there seems to be a “rare earth” project buy an Australian listed company called “Greenland Mineral and Energy”, the so called Kvanefjield deposit.

Additional interesting articles form the Web about the natural resources developement in Greenland

Natural resources and Oil in Greenland
Cairn’s drilling results in Greenland
Chinese interest in Greenland
Chinese workers to be “Imported” ?

So it seems to be that the Government in Greenland seems to “warm up” to the natural resources projects. Maybe this is the reason why Management is buying shares since end of October. The amounts are not huge but every other day one can see purchases.

Summary:

Although I wish I had discovered Gronlandsbanken some months ago, I still think it is a really interesting stock:

– as it is the only bank in Greenland, its margins are around twice as high as the best global banks and the balance sheet is rock solid. One could call this a natural moat
– even based on the current state, current valuation implies significant upside to fair value
– the Greenland resource story could add significant growth going forward, even with maybe other banks entering Greenland
– finally, Management has started to buy shares after surprisingly good Q3 numbers
– although there is no direct catalyst, an indirect catalyst could be if some of the projects proceed well and Greenland will move inte the spotlight. Gronlandsbanken is the easiest (and only) way to invest into Greenland without project specific risk

As a result, I will start with a 1% position in order to further track this interesting “opportunity” stock.

17 comments

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  • Finanstilsynet (the Danish regulator) is making rounds in different financial institutions to evaluate their loan books and risk levels. The latest visit at Gronlandsbanken ended with a report that is one of the cleanest and shortest ones I have seen (I follow these since I’m interested in a couple of Danish banks). http://www.finanstilsynet.dk/da/Tal-og-fakta/Vurderinger-af-finansielle-virksomheder/2012/VU-Groenlandsbanken-AS.aspx

    The only real issue was that they were a bit too focused in their 10 biggest customers. 3 of these however where pure state functions so these could hardly be considered big credit risks!

    The requisite solvency of 10,3% is considered fine. That’s a very low number in a relative sense. Too bad this sucker is not cheaper.

    Banknordik has Greenlandic operations too, by the way. That’s an interesting stock in and of itself too (great core earnings compared to mkt cap but still much overhead arising from recent acquisitions).

  • Bei den Dividenden hat sich glaube ich eine Zahlung zuviel eingeschlichen. 2009+2010 wurden keine gezahlt, oder?
    Das drückt den 10-Jahres-Schnitt bei mir um 1.7%.

    Das Eigenkapital wurde 2004 aufgrund der Accounting Umstellung um DKK 75mln gepusht. Soweit ich gesehen habe war das eine Aufwertung von Immobilien sowie eine Auflösung einer Kreditrückstellung. Den Push würde ich fast als non-recurring sehen, oder?
    Das drückt bei mir den Schnitt nochmal um 1.4%.

    Dann bleibt bei mir noch eine Rendite von 12.5%, vor Dividendensteuern. Da das Management den Anschein macht, möglichst viel Gewinn ausschütten zu wollen (in einem Bericht war vom Ziel 100% die Rede), wäre es sehr interessant, diese zu kennen.
    Für Grönländer mit 42% Dividendensteuer drückt das die Rendite um weitere 3.9% auf 8.6%. Bei angenommenen 15% Quellensteuern gehen einem im Schnitt “nur” 1.4% Rendite jährlich verloren.

    • hallo,

      ja, aus irgendeinem Grund zeigt bloomber 60 Kronen zuviel in 2009. Ich bereinige normalerweise immer die Daten nochmal “händisch”, hab das übersehen . Danke !!

      Bei mir im Modell bekomme ich dann ungef. 13% Ek Rendite. (5+10 Jahre).

      mmi

  • Man könnte sagen die Mutter hat einen Weg gefunden, ihre Steuern an die Kinder abzuwelzen, sodass sie besser dasteht. Die tax benefits sind soweit ich sehe der Hauptgrund, warum der “total ROE” wesentlich höher ausfällt als der “real ROE” – abgesehen vielleicht von den ständigen Aufwertungen von Mitarbeiterbehausungen 😉

    Demnach ist die Steuer, die ich als Kind trage schon wichtig für meine persönliche “total ROE” Kalkulation. Für grönländische Kinder gilt wahrscheinlich “total ROE” = “real ROE” (zumindest nahe dran).
    Wie fahren die deutschen Kinder…?

    Unabhängig davon komm ich nicht auf deine Zahlen, mmi. Beim 12-jährigen “real ROE” habe ich ca. 11%. Beim “total ROE” ca. 13% (14%, wenn du den accounting change “windfall” Ende 2004 einrechnest). Wie hast du die 15-16% berechnet?

    • hmm, also simpel nach meienr Standardmethode. Änderung EK + ausgeschüttete Dividende geteilt durch durchschnittliches Ek.

      2002 bis 2011 komme ich auf folgende Renditen:
      11% 10% 26% 13% 11% 13% 11% 27% 24% 6%

      Das macht im Schnitt 15.4%

      Buchwerte:
      288.6445 294.8993 295.5142 342.77 354.6943 360.8063 363.0948 348.1804 386.2829 424.5502 453.0637

      Dividenden:

      30 35 35 35 45 55 60 60 0 10

      Ach so: Ich nehme immer 10 und 5 Jahre.

  • CostasCo :

    Hi there,

    good discovery that Gronlandsbank, unfortunately I can only find it traded on LSE, Nasdaq and Zuerich with anaemic volumes. So the opportunity of investment might not be practical after all.

    Hi Costas,

    for my volumes, the liquidity is Ok. I ordered it on the Danish stock exchange. I see for instance now ~1700 shares available at DKK 465.

    For a multibilion hedge fund it might be to oilliquid. Howver this is the big advantage of being a “little” guy.

  • Hi there,

    good discovery that Gronlandsbank, unfortunately I can only find it traded on LSE, Nasdaq and Zuerich with anaemic volumes. So the opportunity of investment might not be practical after all.

  • Their 2004 annual report states “The bank’s sharehold- ers receive their dividends less 40% dividend tax”.

    KPMG says “Foreign companies which receive dividend from Greenlandic companies are subject to limited tax liability on the dividend. The withholding tax amounts to between 37 and 44 percent depending on the fiscal domicile of the Greenlandic distributing company. A special provision applies to companies which are subject to the Act on Mineral Resources.”

    40% dividend taxation seems very high to me. Anybody got further information on this?

    • I was actually exepecting this question sooner as many people seem to be highly concerned about dividen taxes 😉

      From the homepage:

      Because The BANK of Greenland is domiciled in Greenland, it is also taxed in Greenland in accordance with Greenland’s legislation on income tax.

      In accordance with § 86 in the law, The BANK of Greenland is required to withhold tax on dividends for the calendar year in which the dividend is paid with a tax ratio laid down by the Municipality of Nuuk. For the time being, the aggregate tax rate is 42%. Tax on dividends is a definitive tax that can only be refunded to a person who, in accordance with the law’s § 3, is exempt from a tax obligation or is residing abroad.

      If you are living abroad, please contact the Tax Administration in Greenland in order to be granted a refund of your dividend tax in accordance with the tax legislation in your own country. The tax administration can be contacted at tax@nanoq.gl or by writing to Imaneq 34, Postboks 105, 3900 Nuuk. Remember to enclose documentation of your dividend payment from The BANK of Greenland.

      So as a non-resident one can ask for a refund. I don’t know how that works but as this is the only listed company and the number of shareholders is small, this might function.

      More interesting is the following fact:

      Gronlandsbanken can deduct the dividend payment from their income tax basis !!! So if you really can make the refund work, you are only paying German tax on this and no Greenland corporate tax. For the dividend tax specialists, this could be quite attractive.

  • Wexboy :

    I What’s the expected value of all that, versus buying another stock which might offer a cheaper price & higher/steadier growth? Tough question, I’m not sure!

    This actually rung another bell for me: First Opportunity Fund Inc. owns a v small stake. Nick Adams presumably bought the holding, so Wellington Management might have an ongoing interest here.

    thanks for the info. With regard to expected value: I think it might not be higher than for instance for an Italian bank. However it is a lot less correlated to the Euro crisis which is something I really like.

  • I was fascinated when I saw this pop up in your prior article (and pleased to see you mention 2 Finnish stocks I’ve been tracking closely as potential buys). Fascinated enough to run my own slide-rule over it… I guess it’s actually a frontier market stock. And I agree, I love the equity ratio & it’s not expensive. Reminds me of de-mutualized US community banks/thrifts who usually start with that kind of ratio & don’t look particularly cheap on a Price/Book ratio – but then they ramp up, or get taken over!

    It certainly offers a free option & I don’t see a big risk of losing money here – the worst that might happen is a few years of boredom/frustration. I suspect it’s a stock that could go nowhere for years, or perhaps it could suddenly triple at some point in the space of 6/12 mths. What’s the expected value of all that, versus buying another stock which might offer a cheaper price & higher/steadier growth? Tough question, I’m not sure!

    This actually rung another bell for me: First Opportunity Fund Inc. owns a v small stake. Nick Adams presumably bought the holding, so Wellington Management might have an ongoing interest here.

  • Hi mmi,

    Sehr schönes Beispiel. Bist du sicher, dass das nicht die Zentralbank von Grönland ist? 😉 Zumindest könnte man das denken, wenn man deren Finanzierungskosten sieht. 95% des externen Geldes kostenfrei? Grönbanker hätte man werden sollen 😉

    Das sind schon ROAs, die man in Europa selten sieht. Wenn sie nur nicht beim Egenkapital so – extrem – konservativ wären.
    Mir ist nicht ganz klar wie dein Modell auf 15-16% total ROE kommt. 10% ja, aber 15%?

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