Short cuts: KAS Bank & Van Lanschot

Both Dutch Banks in my Portfolio, Van Lanschot and KAS Bank reported 6 month numbers last week.

Van Lanschot

Van Lanschot’s 6 month numbers were relatively solid in my opinion. 6 months EPS were 1,14 EUR per share, however this includes certain one-offs from asset sales. The underlying wealth manangement business seems to have stabilized. Net interest income is slightly going down but this is the result of shrinking their loan portfolios and was expected. The stock price reacted quite positively on those numbers:

What I didn’t like at all was the fact that within the comprehensive income, they burried a large increase in their pension reserves of around -82 mn before tax. This is around 10% of gross pension liabilities and wiped out all the profit of Van Lanschot in the first 6 months (comprehensive income was actually negative). Unfortunately, there is no explanation given. I Have sent an Email to IR in order to understadn this better.

KAS Bank

Similar to Van Lanschot, KAS Bank presented very solid 6M numbers including a big one time effect. They received 20 mn EUR as compensation for letting German dwpbank out of an outsourcing contract. Underlying profit without this one off increased nicely, although mostly due to cost savings than higher revenues.

Compared to Van Lanschot, the stock price did very little:

Maybe this has to to with a somehow muted outlook and the decission to fully reinvest the dwpbank payment. Nevrteheless, for me KAS Bank seems to be on a very good way and is rather a buy on weak days. I still think that KAS Bank should trade at least at book value which is around 14,50 EUR per share.

KAS Bank in my opinion is also a very good and cheap interest rate hedge. If short term rates rise, this will directly benefit KAS Bank’s result within a very short time frame. I do not have an active opinion on interest rates, but it is a nice “add on” to the investment case.

14 comments

  • Perhaps interesting anaysis: https://www.valueinvestorsclub.com/idea/van_Lanschot/138156 (Guest memership required)

  • Hello mmi, I would like to get your opinion on 2 thoughts on Banks in general.
    1) If Risk and Return are correlated, the ongoing deleveraging and requirement for more core capital and less risk on balance sheets means lower profitability of banks midterm.
    2) The still increasing European regulation brings more costs, which may not be transferred easily to customers. Hence profit margins for banks can be expected to decrease further.

    • @Covacoro: Your two thoughts are the main reason why there are not too many banks being traded far above book value…

    • #covacoro,

      clearly, the general environment for banks does not look very nice. But the good thing is; this is no secret. The question is how much of that is already baked into current prices ?

      In general I think all the regulation is targeted towards the mega banks, that’s why I prefer the smaller “specialist” players. You will not see a Deutsche Bank or BNP in my portfolio….

      mmi

      • The capital requirements of the CRR (aka Basel III) have to be applied to both sizes of banks alike, the BNPs and the KASs. In my opinion cost control will be crucial (reducing staff, marketing costs, etc.) in the future since all the banks are facing declining ROE. And to be honest: I think a well managed “Mega bank” has some serious advantages in this regard…

        • And there is one more thing to add: since the risk weight for high-rated sovereign bonds according to Basel III is zero at the moment, a lot of banks could be in very serious trouble at the time when interest rates start to rise again…

        • Contrary to your opinion, I think that rising general interest rates would be very benificial for banks. Banks are usually interest rate matched, this means a rise of the general interest rates has no impact. With higher interest rates it is much easier to charge higher credit margins. It is not a surprise that the most profitable banks are banks in high interest rate countires (Brazil for instance).

        • No, I disagree. Cost advantages in banking diminish surprisingly quickly. Employees of larger banks for instance expect proportionally higher salaries and the added complexity creates a lot of costs that small players don’t have.

          And capital requirements for SIFIs are clearly higher than for non SIFIs. I do not want to won any “Megabank”

        • ad interest rates: What I meant was that since the risk weight of sovereign bonds according to Basel III is zero, all the banks have strong incentives for buying them (also very well above par). Rising interest rates would lead to serious fair value adjustments here (since they clearly are not all carried as held for maturity) and will maybe cause additional capital needs. Beside that rising interest rates would off course be positive to a certain extent for their core business (lending), since the interest rate spread could be widened.

          ad capital requirements: What I was saying was that the CRR is applicable to both kinds of banks. A lot of banks in Austria – which are by far not all systemically crucial – are expecting a huge decline in ROE to a level, where a price above book value isn`t justified. Additional to that there is the need for a bankruptcy regulatory for SIFIs, but that is not worked out yet.

          ad cost advantages: Banks are offering a commodity. In such a business there is imho nearly always an advantage for the “bigger one” because of the classical “economies of scale”. But I guess this is just a wait and see scenario 🙂

        • no, banks per se have no interest in buying sovereign bonds just because of the low risk weight. They did buy them for the LTRO trade and as you might know, any mark to market gains or losses are booked directly via equity. They made a lot of money on that and this clearly helped them to restore their capital base. The LTRO portfolios are short term with very low interest rate sensitivities.

          Austrian banks in my opinion are a special case anyway. They agggresively expanded in Eastern Europe and have now to work through a huge portfolio of bad debt. The domesic layers are suffereing as well as the old tax savings schemes don’t work anymore. I have looked at some Austrian Banks but didn’t like any of them.

          And again:Econimies of scale in banking are not very relevant these days. A reatively small direct bank has a big cost advantage against most large banks with expensive branch networks. That’s why any of the big banks are struggling.

        • @mmi: I think we don`t have to agree here 🙂 BTW: Did you already receive an answer from the IR at Van Lanschot?

        • #daniel,

          yes , we agree to disagree. Yes, VL said that interest rates are to blame mostly, but also different inflation assumption. They gave no details.

          mmi

  • Hi mmi,
    yes, quite a few surprises during H1 2014 results with pensions.
    Actually, it seems to me KAS bank as well booked 15M€ loss due to pensions in comprehensive income. Fortunately for them and for you, there was this payment from dwpbank…

    • @mmi: in the annual-report for 2013 there may be a small hint on page 44. It reads “The gradual raising of the state retirement age and the existing pensions legislation require that we adapt our pension schemes.
      We intend to do that in 2014.”

      I think that if their emloyees have to work longer before retirement, the payments according to the defined-benefit-plans may increase significantly. Also they could have used a lower interest rate for discounting in the pv-calculation. I have seen it on several occasions in 2014, that companies lowered their interest rates for discounting because of interest rates going down in general.

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