Initial Public Offering on the Baltic market is a rare event; therefore, it is always in the center of attention and local investors are closely watching how successfully it will turn out. During the last four years 5 new companies were successfully listed on the Baltic market: Novaturas, LHV Group, Eften III Real Estate Fund, HansaMatrix, Tallina Sadam and there was also one unsuccessful IPO attempt of Citadele Bank.
Now, Estonian Coop Bank is making headlines. The good news is that anyone from Baltic countries can participate in IPO frenzy and not just Estonian residents (as it was in case of LHV and Tallinna Sadam, when only Estonian residents were allowed). From the standpoint of existing shareholders and the company’s management, the potential success rate of this IPO has increased as the pool of investors for Coop Bank stock got wider.
Coop Bank is an Estonian capital bank, carrying its business only in Estonia. Group’s main strategic shareholder with ~60% of shares is Coop Eesti, Estonia’s largest group, engaged in sale of food and convenience goods. It consists of 19 regional consumer co-operatives (has around 80 000 members) and has 350 shops and nearly 600 000 regular customers. As a result, Coop Bank is an organization with very deep roots in Estonia’s society as Coop shops, having the highest market share by revenues in Estonian consumer market, are widely spread all over the country. Therefore, the group uses its partnership with Coop Eesti to focus on private customers and small and medium-sized businesses.
Why IPO now?
Coop bank is tight on capital and lacks sufficient financing to continue its accelerating growth strategy based on a rapidly expanding loan portfolio.
Coop Bank is experiencing fast growth in Equity, Loan and Deposit portfolio
Source: Alphinox calculations, Coop Bank prospectus
In the past, growth was mainly financed through retained earnings and issue of subordinated bonds (total 7mn EUR in subordinated debt). Now the company seeks to attract ~37 mn EUR of capital by offering up to 46.28 mn shares (32.18 mn new shares and 14.10 mn shares from existing shareholders) in a price range of 1.15-1.30 EUR. Total outstanding amount of shares is forecasted to increase to 94.4 mn and company’s market cap is set to reach ~120mn EUR (to compare: market cap of LHV is 343 mn EUR and Siauliu Bank is 309 mn EUR).
Coop Bank’s business model in brief:
1) The Bank operates under current name and with existing set-up since 2017. It was known as Krediidpank since 1992, but because of USA sanctions against Russia (bank’s major shareholder was Russian VTB Bank) Coop Eesti Keskuhistu and Inbank AS acquired it in 2017 and renamed to Coop Bank.
2) As of September 2019, it had over 56 000 bank clients and its subsidiary Coop Finants (consumer finance) had 87 000 customer contracts. Company has over 100 000 Saastukaart+ users (Coop shop loyalty card with credit card’s features). The bank significantly increases its operating volumes and plans to grow its number of clients to 100 000 until 2022.
Source: Alphinox, Coop Bank prospectus
Thanks to its partnership with Coop Eesti (store chain), bank’s clients have access to 330 spots in the Coop shops, where they can perform their daily banking operations such as, withdrawing or depositing money, applying for a small loan, etc.
The branches, banking points, banking stations and Coop shops of Coop Bank located across Estonia. (Source: Coop Bank homepage)
By partnering with Coop Eesti company has access to the largest existing cash network in Estonia, which provides significant competitive advantage to the bank even in the digital era, when the majority of banking operations can be carried online. Access to wide network of clients allowed the bank to expand its presence in the domestic market: since 2016, the group has been able to increase its market share - from 1.4% to 2.3% in deposits and from 0.9% to 2.0% in loans. Based on total assets of Estonian banking market, its market share is 1.3%, which would rank the Coop Bank as 8th largest in Estonia.
Source: Alphinox, Coop Bank prospectus, Finantsinspektsioon Estonia (as of 30.06.2019)
Coop Bank’s management particularly puts emphasis on the bank’s brand awareness in Estonia, where it ranks 5th with a significant gap from the pursuers.
Source: Coop Bank webinar 18.11.2019
The discrepancy between the bank’s market share (8th place in market) and its notable brand awareness indicates that there is a potential for further market penetration.
3) The growth in recent years was quite significant (loan portfolio CAGR of 44%): Company’s goal is to grow its loan portfolio to 1 bn euros from current 418 mn until 2022.
Source: Alphinox, Coop Bank prospectus
Noteworthy, the company started to focus more on business sector: in 2016, private mortgage loans made 64% of loan portfolio, while in 2019 it was reduced to 40% as share of business loans has increased from 20% to 33%. Corporate loans are concentrated around the companies operating in real estate sector (31% of corporate loans), which increases bank’s sensitivity to the macroeconomic cycles. Other corporate loans are granted primarily to wholesale and retail sector. To compare, share of real estate loans in LHV Bank’s portfolio is 26% and that of Šiauliu Bank’s is 13.5%. Top eight clients account for more than 10% of Bank’s eligible capital or EUR 42.7 mn, with largest loan being EUR 6.9 mn (1.6% of total loan portfolio).
With regard to another part of the bank’s balance sheet -deposits- Coop bank does pretty well too: deposit portfolio has doubled since 2016 with term deposits as major driving force.
Source: Alphinox, Coop Bank prospectus
This splendid growth is explained by possibility to easily tap into deposit funding markets abroad. Coop bank actively uses online deposit marketplace Raisin through which deposits from German depositors can be obtained. Lately, company has also received rights to receive deposits from the Dutch and Spaniards. However, the company’s plan is to reduce its dependence on Raisin platform and to increase amount of installments from local residents. As of 30 September 2019, around 25% of all deposits came through Raisin platform and funding costs were 1% in 2019 (0.8% in 2018). Funding costs has been under pressure as the increase in demand for customers deposits has not been sufficient to finance bank’s fast- growing loan portfolio.
4) Vast majority of Coop bank’s income (net interest income, net fees and commissions) is coming from Consumer financing and Corporate Banking segment, followed by Retail Banking.
Source: Coop Bank prospectus
Coop Bank undergoes fast growth phase and its Cost/ Income ratio is on a rather high level, while ROE is lower if compared with more mature banks on Baltic market. For example, LHV has Cost/Income ratio of 52%, and more mature Baltic banks have this ratio at 40% (Šiauliu Bank) and 67% (Citadele Bank). ROE for LHV is 18%, 19% for Šiauliu Bank and 12% for Citadele Bank. The company plans/aims to stabilize costs to improve its Cost/Income ratio and ROE by 2022, planning it below 50% and around 15% respectively.
Cost Income Ratio and Return on Equity; Source: Alphinox, Coop Bank prospectus, LHV, Siauliu Bank, Citadele Bank Annual Reports
Company plans to start paying dividends (25% of net profits) as of 2022. Its Baltic peers, LHV and Šiauliu Bank, are already dividend paying stocks. LHV’s dividend yield is 1.76%, that of Šiauliu Bank’s - 5.75%, while Baltic stock market’s median dividend yield 5.9%.
Based on the offered price range of IPO, we estimate Coop Bank’s 2019 P/E of 19.4-22.0 and P/B of 1.15-1.3. To compare, LHV has 12 month trailing P/E of 12.8 and P/B of 1.9, which could be classified as a growth stock within Baltic stock market context. Šiauliu Bank, which can be considered as a value stock, has P/E of 5.0 and P/B of 1.0.
Estonian banking market was shaken by a number of scandals and making few market participants to become extra careful in doing business. Therefore, there could be an untapped potential for active and opportunistic bank, although the main concern is how well Coop Bank will be able to use synergy between banking and retailing. If judged by valuation estimates, company’s proposed IPO price is justified by its growth potential and risk associated with it.