Financials, Romania 20 May 2020 Patria Bank Group Hold Initiation of coverage Price: RON 0.082 Price target: RON 0.085 Financing Romanian SMEs We initiate coverage of Patria Bank Group with a price target (PT) of RON 0.085, offering upside of c.3.5%, and a HOLD rating. Patria Bank is Expected events micro-cap company, trading on the local Bucharest Stock Exchange, and a niche player, with expertise in issuing loans to SMEs and micro- WOOD’s virtual conference 28-29 May companies in the agricultural sector in Romania. We appreciate the Conference call 11 June bank’s specialised exposure and high margins but, on the negative side, 1H20 results 17 August 3Q20 results(stand-alone) 16 November we highlight its higher C/I ratio and NPLs, and weaker capital ratios vs. Conference call 23 November its peers. Despite this, we believe the bank should be able to weather the current COVID-19 crisis. We find the stock fairly valued at the current Key data share price levels, trading at 0.9x P/BV on our 2020E. Patria Bank – a niche player in the Romanian market. The bank issues Market Cap USD 59m loans to SMEs, as well as micro-companies and entrepreneurs in the Free float 17% agricultural industry. This allows it to charge higher rates, and we expect NIMs 3M ADTV USD 4,000 Shares outstanding 3,115m of 3.5%, 3.7% and 3.8% on total average assets in 2020E, 2021E and 2022E, Major Shareholder EEAF (83.2%) respectively, higher than the NIMs we expect for its larger peers. Despite its Bloomberg Code PBK RO Equity higher NIMs, the bank is able to keep its COR within reasonable limits, which BET Index 7,964.0 is proved by its provisions-adjusted NIMs, i.e., NII less provisions over total average assets, which are comparable to some of Patria’s larger peers. We Price performance assume CORs of -1.70%, -1.50% and -1.30% in 2020E, 2021E and 2022E, respectively, elevated on the back of the current economic crisis. 52-w range 0.07-0.12 Profitability and earnings growth potential. Patria Bank, following the 52-w performance -3.98% Relative performance -0.82% merger with Banca Comerciala Carpatica in 2017, became profitable only recently. Its lower scale and higher cost structure prevent higher profitability. However, on the back of an increasing top line and some cost-saving potential, Patria 12M share price performance we believe Patria should continue to expand its bottom line and we anticipate 0.12 ROEs of 2.6% and 5.5% in 2021E and 2022E, respectively. We also calculate 0.11 0.10 a long-term ROE of 11.1%. The largest risk for its profitability is currently the 0.09 COR charges in 2020E and 2021E amid the COVID-19 crisis, in our view. 0.08 0.07 Weaker asset quality. The bank has carried a legacy book of NPLs since the 0.06 merger. While it has been quite successful in disposing of them, with the NPL Jul-19 Oct-19 Apr-20 Jun-19 Jan-20 Feb-20 Mar-20 Aug-19 Sep-19 Nov-19 Dec-19 May-20 ratio dropping from 24.52% in 2017 to 12.05% in 2019, the ratio remains higher May-19 PBK RO Equity BET Index (rebased) than the sector averages. Due to the current economic backdrop, we believe the ratio may remain elevated, at 13-15% in 2020-21E, before starting to fall again in 2022E. The SME segment has the highest NPL ratio (16%), but also showed the largest decline in said period. Lower capital ratios at the start of the crisis than its peers. Patria’s capital is tighter when compared to its regional peers, despite the recent issue of Tier II-eligible subordinated bonds worth EUR 5m. The Tier I ratio was 14.92%, while the CAR was 17.40% as of 2019. The central bank’s decision to allow lenders to use their two capital buffers in force currently (a 250bps capital conservation buffer; a 100bps OSII buffer) should allow Patria some flexibility during the crisis, in our view. We see the bank trading near its fair value currently. Our PT of RON 0.085/share implies a 2020E P/BV of 0.98x, which is near the bank’s historical average. Similarly, the current discount vs. its peers on P/BV is hovering near its historical average. With such a valuation, we believe our HOLD rating is justified. Year NII Net profit EPS PE BVPS P/BV ROTE DPS Dividend (RON m) (RON m) (RON) (x) (RON) (x) (%) (RON) yield 2017 117,421 -43,600 -0.0192 n.m. 0.099 1.3 n.m. 0.00 0.0% 2018 116,393 -3,978 -0.0015 n.m. 0.098 1.2 n.m. 0.00 0.0% 2019 129,861 3,416 0.0011 n.m. 0.103 0.9 1.3% 0.00 0.0% 2020E 116,432 -5,243 -0.0017 n.m. 0.091 0.9 n.m. 0.00 0.0% EQUITY 2021E 125,166 7,587 0.0024 33.7 0.094 0.9 3.1% 0.00 0.0% 2022E 133,502 16,417 0.0053 15.6 0.099 0.8 6.5% 0.00 0.0% RESEARCH Analysts: David Lojkasek; Alex Boulougouris, CFA Prague: +420 222 096 256 E-mail: [email protected], [email protected] Website: www.wood.com Contents Company snapshot – HOLD, PT RON 0.085 .................................................................................................. 3 Investment case ................................................................................................................................................ 4 Valuation ............................................................................................................................................................ 8 Financial forecasts – breaking even and further growth potential ........................................................... 11 Risks ................................................................................................................................................................ 15 Briefly on Patria Bank: financing “Second Romania” ................................................................................ 16 Financials ........................................................................................................................................................ 18 Important disclosures .................................................................................................................................... 20 Closing Prices as of 18 May 2020 © 2020 by WOOD & Company Financial Services, a.s. 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Palladium, Namesti Republiky 1079/1a, 110 00 Prague 1 – Czech Republic tel.: +420 222 096 111 fax: +420 222 096 222 http//:www.wood.cz Patria Bank 2 WOOD & Company Company snapshot – HOLD, PT RON 0.085 Patria Bank HOLD COMPANY DESCRIPTION Bloomberg ticker PBK RO 0.12 Closing price (RON) 0.082 0.11 Price target (RON) 0.085 0.10 Patria Bank is a micro-cap bank based in Romania, w here it issues loans to SMEs and micro-companies mostly Upside to PT 3.5% 0.09 operating in the agricultural industry. It w as established in 1993 as Romexterra Bank, w hich later changed to Shares outstanding (m) 3,115 0.08 Nextebank. In April 2014, Emerging Europa Accession Fund (EEAF), a private equity fund, took over the majority MCap (RON m) 255 0.07 stake in the bank, and also changed its name and brand to Patria Bank. In the first half of 2016, the bank acquired a Free float 17% 0.06 majority stake of more than 60% in Banca Comerciala Carpatica and the tw o banks merged. The merger w as 3M ADTV (USD ths) 4.0 finalised in May 2017. The bank operates in four segments – Agri, Micro, Retail and SMEs. 52 Week Range (RON) 0.07-0.12 PBK RO Equity BET Index (rebased) FINANCIALS (RON m) Growth rates 2017 2018 2019 2020E 2021E 2022E 2018 2019 2020E 2021E 2022E Net interest income 117,421 116,393 129,861 116,432 125,166 133,502 Loans and advances to customers 16.3% 3.7% 0.0% 7.5% 7.6% Net fee and commission income 22,233 23,147 26,316 22,892 24,284 26,027 Deposits -5.4% -10.8% 4.3% 2.7% 2.7% Other operating income 21,280 26,567 19,529 17,866 18,212 18,871 Equity 36.3% 4.5% -11.0% 2.7% 5.6% Net operating income 160,934 166,107 175,706 157,190 167,662 178,400 Assets -5.4% -7.7% 2.7% 2.7% 2.9% Total operating expenses -183,731 -169,877 -149,594 -134,329 -132,912 -134,888 Net income -90.9% n.m. n.m. n.m. 116.4% Profit before provisions, impairments -22,797 -3,770 26,112 22,862 34,750 43,512 Net interest income -0.9% 11.6% -10.3% 7.5% 6.7% Impairment of financial assets -19,950 580 -16,404 -28,105 -25,718 -23,968 Gross result -42,747 -3,190 9,708 -5,243 9,032 19,545 RATIOS & VALUATIONS Tax expense -853 -788 -6,292 0 -1,445 -3,127 2018 2019 2020E 2021E 2022E Net result for the period -43,600 -3,978 3,416 -5,243 7,587 16,417 Net loans to deposits 52.1% 60.6% 58.1% 60.8% 63.7% Deposits to assets 86.3% 83.4% 84.7% 84.7% 84.5% Cash and cash equivalents 642,914 517,436 437,958 490,195 412,174 429,596 Net loans to assets 45.0% 50.5% 49.2% 51.5% 53.8% Financial assets 1,251,030 719,825 503,631 515,448 520,104 425,452 Equity to assets 8.6% 9.8% 8.5% 8.5% 8.7% Due from banks 8,408 5,613 5,683 5,681 6,104 6,568 Capital adequacy ratio 15.7% 17.4% 14.6% 14.2% 14.1% Loans and advances to customers 1,370,125 1,593,914 1,653,586 1,652,874 1,776,222 1,911,145 Tier 1 capital ratio 14.4% 14.9% 12.9% 12.5% 12.5% Other assets 261,728 520,465 515,983 538,800 575,657 615,971 Intangible assets 45,280 42,799 45,763 45,763 45,763 45,763 Net interest margin 4.4% 5.1% 4.8% 4.9% 5.1% Property, plant and equipment 168,105 143,698 108,589 110,760 112,975 115,234 Net interest income to average assets 3.2% 3.8% 3.5% 3.7% 3.8% Total assets 3,747,590 3,543,750 3,271,193 3,359,521 3,448,999 3,549,730 Costs to average assets -4.7% -4.4% -4.1% -3.9% -3.9% Cost to income 102.3% 85.1% 85.5% 79.3% 75.6% Deposits from banks 95,967 6,951 18,627 19,425 19,949 20,489 Pre-tax income to average assets -0.1% 0.3% -0.2% 0.3% 0.6% Deposits from customers 3,231,281 3,057,030 2,728,114 2,844,948 2,921,758 3,000,799 Effective tax rate 24.7% -64.8% 16.0% 16.0% 16.0% Other liabilities 166,301 150,531 170,499 176,438 180,995 185,727 ROA n.m.