05.12.2017

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BAWAG Group initiated at BUY, TP EUR 50.00 - A cost champion with a valuation discount

We initiate coverage with a BUY rating and a TP of EUR 50
Our investment case is supported by (1) the groups solid capital generation capacity supporting a 50% payout, (2) the managements transformation track record resulting in above average profitability (cost/income <42%) and solid capitalisation (CET1 16.2%) and (3) growth prospects from recent M&A activity.

At 1.1x 2018e BV and 2018e ROE of 12% BAWAG trades at a >15% discount to its peers, which we deem excessive given (1) the groups solid capital generation capacity as again evidenced by 3Q numbers, (2) the strong track record of transforming a loss making trade union bank into one of the most profitable (cost/income1-3Q below 42%) and best-capitalised (CET1 at 16.2%) privately owned banks in Austria and (3) the potential of transferring this restructuring success to recent/future M&A targets. We thus initiate coverage with a BUY rating and a TP of EUR 50. A potential share overhang from a further/complete exit of BAWAGs main shareholders might continue to weigh on the share price. (current lock-up phase until 4/2018).

Growth in the DACH region: The bank is committed to expanding in the DACH region through organic and inorganic growth and has completed/signed 5 acquisitions (German Südwestbank, Austrian card issuer PayLife, start:bausparkasse, IMMO-Bank and VB Leasing) over the past 2 years, but is committed not to go below 12% CET1.

Solid track record: Over the past 3 years the group has permanently outperformed its key financial targets. Over the coming years management targets (1) pre-tax profit growth at >5%CAGR based on already signed acquisitions, (2) to achieve a cost-income ratio below 40%, (3) to maintain ROTE (@12% CET1) at mid to high teens and maintain CET1 FL of at least 12%.
Strong capital generation: Digesting signed acquisitions BAWAGs CET1 FL should reach 13% by year-end 2017e. We expect the bank to generate 2%p+ CET1 p.a. through earnings and RWA optimisation via IRB model implementation over the next years, thus reaching a EUR 1.0 bn excess capital over the target CET1 of 12% in the absence of further M&A. BAWAG targets a dividend pay-out of 50% (2017e 50% of avg. quarterly profits plus EUR 50 mn interim dividend) and commits to distribute excess capital which is not deployed via organic growth and M&A.

3Q confirmed previous earnings trend: 3Q numbers were characterized by slightly weaker credit volumes (internat. mortgage portfolio), improved NIM on product mix effects, higher/normalized risk costs, further opex reduction leading to a cost/income ratio below 41% and strong capital generation (CET1 up 70 bps qoq).
Valuation/risks: We derive our target price of EUR 50 as an average of intrinsic (DDGG, adj. Gordon Growth) and peer-based valuation methods. As main risks we consider the successful separation from the Austrian Post cooperation, business continuation of BAWAGs international operations without Cerberus as main shareholder and the Linz SWAP case.

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