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Vestjysk Bank - ABGSC’s DK small/mid-cap seminar feedback

23 september 2020

ASF still distant while initiatives and DPS moving closer
M&A could come back as a theme after deal today
VB trading at a 21e adj. PE of 8.7x; 20e P/NAV of 0.81x
Agricultural exposure reduced to 15%
Today, the CEO of Vestjysk Bank (VB), Jan Ulsø Madsen, presented at our virtual Danish small-/mid-cap seminar. VB has a market share in Denmark of ~1% (with lending exposure concentrated in Jutland, while the branch network stretches from the west coast over the middle of Jutland to the east). The bank has ~390 employees. Exposure is tilted towards agriculture, but this has now been reduced to 15% of lending and guarantees (fish sector exposure makes up an additional 6%).

Well-provisioned for ASF, lending to rebound and DPS ahead
The CEO mentioned that VB has looked into different scenarios for African Swine Fever (ASF) moving closer to Denmark. With the current price for pork meat paid to Danish pork farmers (5% exposure for VB) of DKK 10.3/KG, he would still see a potential for loan loss reversals and farming debt reduction, while ASF occurring in the North West part of Jutland could potentially require new loan losses. We argue VB is well-provisioned, with DKK 2.3bn in the writedown account. The CEO sees a reversal of the steep drop in lending Q2’20 (5% down q-o-q), driven by support package liquidity; as this is repaid he expects a rebound in lending volumes. On the deposit initiatives, the CEO had a view that the sector might take the limit for pricing retail deposits further down (VB has a DKK 250,000 limit), while the charge for deposits could also come up as a theme. On the capital side, he pointed to VB now being so well-capitalised (Q2 CET1 of 19.6%) that expensive MREL papers were not a necessity anymore, while the board will look into capital planning and a potential DPS at some point; we believe a DPS for 2021 is realistic.

Price multiples have moderated while M&A angle persists
Price multiples for Vestjysk Bank have come down to a ’21e adj. PE of 8.7x and a ’20e P/NAV of 0.81x, perhaps linked to African Swine Fever (ASF) coming closer to Denmark. ASF is still a theme for Vestjysk Bank, while the M&A angle could come back into play (Arbejdernes Landsbank owns 32.44% of the shares) following the merger announced today between Salling Bank and Sparekassen Vendsyssel.

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