Tag Archives: Gronlandsbanken

Banking update: Handelsbanken, Lloyds Banking & Gronlandsbanken (sale)

Although I usually don’t care that much about quarterly earnings, let’s start with two interesting ones:

Handelsbanken

Handelsbanken is on my watch list, I consider them as one of the best bank franchises globally but still a little bit too expensive. Officially, “Mr. Market” was disappointed because earnings were below expectations. The stock dropped around 8% on that day:

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Update Gronlandsbanken – result and annual report 2014 & Danish interest rates

Gronlandsbanken

Gronlandsbanken has just released 2014 numbers and its 2014 annual report. 2014 results look solid: ~50 DKK profit per share, roughly 6% more than in 2013. The dividend remains at DKK 55 (dividend is paid out of pretax income). ROE has remained high at 16,3%. The result would have been even better if Gronlandsbanken would have not increased reserves. This is the quote from the annual report:

The result before value adjustments and write downs of DKK 148,6 million is the Bank’s best basis result so far. This is of course satisfactory. It is at the same time above the last announced results expectation of a result before value adjustments and write downs in the upper end of the range DKK 125 – 145 million. The result before tax returns 16.3% on year start equity after dividend.

This was achieved against a slight drop in Greenland’s GDP which I find quite remarkable. The stock market seemed to have “anticipated” those results to a certain extend as the stock price shows:

The balance sheet is still super rock solid with an equity ratio of 19% (of total balance sheet, not risk weighted assets or some similar shenanigans).

My initial investment thesis 2 years ago was the following:

– 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 into the spotlight. Gronlandsbanken is the easiest (and only) way to invest into Greenland without project specific risk

One of the issues of course is that most of the natural resources projects look a lot less likely to happen than 2,5 years ago.The annual report is as always a great resource to see what is going on in Greenland. Most projects seem to be on hold or cancelled, the only remaining interest is from China:

Among the larger projects, it has become obvious that virtually only Chinese investors continue to show a certain interest. The BANK of Greenland considers it likely and quite naturally, that the funding can come from China. Chinese enterprises are often the leaders in processing for further use in either Chinese, American, or European industry.

Especially the oil sector has been hit hard:

The prospects of the oil area are more dismal than of the mineral area. After Cairns test drilling in 2010 and 2011, oil exploration in Greenland is now greatly reduced, see Figure 8. The stagnation of the exploration in both the oil and the mineral area is expected to continue over the next few years, even though new licenses have been issued and the preparatory work is continuing in 2014 as well.
The declining interest in oil exploration is a.o. due to large oil and gas discoveries in other places, and the fall in the oil price . Of importance can possibly also be the administration and regulation of the area so far have not been regarded as sufficient by several persons in the industry.

So the bad news is that within my initial time frame of 3-5 years, I will not see any large mining or oil projects in Greenland. The upside might be that the incentive for other banks to enter Greenland will be most likely quite low.

Interest rates

However, another thing happened which was not on my radar screen: Denmark went from having low-interest rates to negative interest rates. This is how 3 month local swap rates developed:

dkk ir

Just as a reminder: Swap rates are “unfunded”, that means based on contracts where no principal changes hands. If we look at “funded” rates, so how much money Danish banks pay for actual deposits, the situation is much more dramatic:

dkk fund

So just to put this in context: If you want to deposit money for 3 months at a Danish bank for 3 months in DKK, they charge you -1,6% p.a. for this “service” !!!!

Impact on Gronlandsbanken:

One thing about Gronlandsbanken which I liked initially but what could be a problem going forward is the following: Gronlandsbanken has a significantly higher deposit base than loans outstanding. While this is good from a liquidity and risk point of view, it is bad because those excess funds have to be invested somewhere and in local currency.

I am not sure if Gronlandsbanken could actually charge for deposits locally, so the risk is there that they get squeezed on the amounts not loaned out to customers. They seem to have anticipated this and increased their bond holdings, but still, at year end 2014, roughly 20% of the balance sheet is potentially exposed to this potential “Negative carry” problem.

On the other hand, as a EUR investor being invested into a DKK security exposes me to a “positive Black Swan” similar to the CHF/EUR move in January. If something goes horribly wrong in the EUR zone, there might be some upside in holding DKK denominated securities.

Addtitionally, any Danish pension fund and Insurance company will struggle to find income producing assets in DKK. With a dividend yield of (gross) of around 8%, Grondlandsbanken should be not unattractive and therefore support the share price in the short term.

Summary:

The underlying business of Gronlandsbanken has done surprisingly well in 2014 despite a lackluster economy. Due to the carnage in natural resource prices, the implied “resource option” has been postponed some years into the future, making the investment case less attractive compared to 2,5 years ago.

Ultra low and negative interest rates could make it more difficult for deposit-rich banks like Gronlandsbanken to maintain their interest margins. As there are not that many alternatives at the moment I will continue to hold the stock for the time being, as it also functions as a kind of “Euro Black Swan” hedge. If I find other interesting finaincial service stocks, Gronlandsbanken would be the first one to be replaced as I think that my other financial holdings (Kasbank, Van Lanschot, NN, Admiral) have a better risk/return ratio.

I will also monitor closely if and how the negative rates will feed through Grondlandsbanken’s Q1 results.

Quick update Gronlandsbanken (DK0010230630) – 9% Dividend yield & elections

Since the first post about Gronlandsbanken last year, the stock developed quite nicely so far, around +33%.

Part of that positive developement can be clearly attributed to the very positive 2012 annual report.

The first sentence of the report sets the tone:

Record Profits at The BANK of Greenland in 2012 – Return on Equity of 17.9% p.a.
Throughout the years of the financial crisis, The BANK of Greenland has managed a consistent series of fine results. Therefore, the bank is satisfied with the fact that the 2012 result was the best in the bank’s history. The profit on ordinary activities was DKr. 135 million – an increase of 72% as compared with 2011.

Earnings after tax were ~51 Kroner per share, resulting in a Trailing P/E of 12. Surprisingly for me, Gronlandsbanken decided to almost double the dividend from 30 Kroner to 55 Kroner, providing a “juicy” 8.8% dividend yield based on current share prices of 625 Kroners.

The report is again a very good summary of the situation in Greenland. They also mention the potential big projects and as a bank of course the recommend the following:

These major projects are a unique opportunity. It is crucial to take advantage of them.

Now comes the interesting part:

3 days ago, Greenland elected a new Government. And, surprise surprise, the opposition party did win, with Aleqa Hammond becoming the first woman to become prime minister.

In the press, the new Government is often cited as “Anti Mining”, in my opinion however they only difference is that they want to receive higher taxes and make sure local people get work too. For the mining companies, this means of course higher costs, but for local businesses (incl. Gronlandsbanken) this could mean that more money stays in the country which would be very good.

An additional interesting aspect was that the old government was against rare earth mining, because that stuff contains Uranium which was a no go for the old president.

There is also a quite recent article in the Economist which kind of confirms that view.

Summary:
So all in all I think the Bank is on good track and the nice dividend will maybe attract further investors. The change in Government should be good for local businesses going forward. I have therefore increased the stake by 1% of the portfolio (2000 Shares) up to a 2% position at a share price of ~630 Danish Kroners, representing the VWAP from March 8th to March 14th.

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.