My Savings Bank growth and profitability have been at a wild level, which has created high expectations for the bank. This has not been reflected in the company’s valuation, because in the light of the valuation coefficients, Finland’s most profitable bank is one of the cheapest shares on the Helsinki Stock Exchange.
Oma Sp is the cleanest of the domestic banks, almost exclusively in traditional banking. Last year this was very productive. The interest cap pool swelled along with the rise in market interest rates Lieto Savings Bank connecting the business to the bank’s figures.
In the last quarter, the bank made an excellent result, but it was a little disappointing for investors. The comparable result before taxes, as instructed by the company, increased to 38.8 million, but the information service Factsetin according to the average expectation of two analysts was 45.5 million euros.
From its price peak at the beginning of the year, the bank’s share price has fallen by more than eight percent.
Based on this year’s profit forecasts, the bank’s p/e ratio is below 6, which makes it the cheapest rated domestic bank.
Analysis house Inderes according to calculations, the bank has been able to win market shares year after year, and between 2017 and 2022, the bank’s lending has grown organically four times faster than the general market.
Since then, the growth has continued, and in light of the numbers, it has been very profitable. In the last quarter, the bank’s return on equity rose to 21.5 percent. The return on equity for the whole year was a record 25.3.
In the long term, the bank’s goal is a return on equity of more than 16 percent. By way of comparison, a return on equity of 12–13 percent is generally considered a strong performance for banks
The company’s balance sheet will be strengthened in the second half of the current year, when the bank is scheduled to complete commercial bank purchase of SME operations. As part of the transaction, the company will also transfer the personal banking services of entrepreneurs, excluding asset management and investment services.
According to OmaSp, this strengthens the bank’s market position among SME entrepreneurs and improves the company’s cost efficiency and business profitability. The bank believes that this will also significantly strengthen the annual profit-making ability.
When considering the bank’s valuation, it may be good to take into account its higher dependence on market-based fundraising than domestic peers.
The International Monetary Fund (IMF) recently highlighted its concerns about the banking sector’s dependence on market-based funding in its assessment of Finland’s financial system.
This is because Finnish banks have a deposit deficit, i.e. the difference between deposits and loans granted to customers is negative. Regarding the domestic banking sector, the loans/deposits ratio in December 2022 was 138 percent, while the EU average in September 2022 was 109 percent.
At the end of the second quarter, the ratio of Oma Sp’s loans to deposits was 155 percent. The higher the ratio, the more dependent the bank is on market funding.
Shirt buttoned to the bank
One of the cornerstones of Oma Säästöpankki’s business is high-quality customer service. The bank still has an extensive branch network covering the entire country. In the digitalization and artificial intelligence boom, this may sound old-fashioned and inefficient. This is not necessarily the case.
The most important bank in the world JPMorgan has started investing in brick-and-mortar offices again. Last week, the bank announced its three-year plan, the goal of which is to build 500 new brick-and-mortar branches nationwide.
The nostalgic road has also had its fiercest competitor Bank of Americawho has told about his similar plans.
Bank managers see potential in the return of branch operations to improve the quality of customer service, especially for small businesses. Personal customers are also more willing to receive a higher quality banking service. This is also seen to expand the financial management possibilities of banks.
“While more customers are using our digital banking services, many still visit our branches to discuss some of their more complex financial needs in person,” Head of Banking Services Aaron Levine stated in the fall.
The plans of the giant banks bring to mind the Finnish church villages, where versatile banking services were brought closer to the people who moved to the villages.
JPMorgan’s goal is that 70 percent of US residents can drive to a bank branch within 10 minutes or less. Bank of America’s corresponding goal is for 80 percent of citizens to be within a 15-minute drive of a bank branch.
From the perspective of these banks, Oma Säästöpankki fits the picture well for its customer base and its 45 branches.
Easy financial management
In the longer term, the brake on the bank’s growth may be relatively light asset management services. In a European comparison, Nordic banks have a strong focus on asset management, which by nature is a stable and highly profitable business. This is where Oma Sp lags behind its peers.
During the zero interest rate period, strong investments in asset management were made, for example Nordea, The Bank of Åland and encouraging from the savings bank idea Aktia. Banks receive fee income from asset management, which compensates for the expected decrease in net interest income in the next few years.
Although there are differences between the banks, it can be noted that the Oma Sp:np/e ratio is in line with Western European banks, the p/e ratio of the FTSE Western European Banks index, which consists of them, is around 6.
Western and Central European banks are traditionally more focused on traditional retail and investment banking. For Oma Sp, additional investments in asset management could give a suitable boost to the company’s valuation.
“In our view, a capital-light asset management business could enable OmaSp to accelerate growth and raise the return on capital even more,” Inderes’ extensive company report says.
Regarding solvency, the bank’s figures remained strong, and credit losses, despite their rise, are not at a worrying level. Analysis House expected the credit losses to be 4.5 million euros, while the realized losses were 7.4 million euros.
A significant part of the bank’s credit portfolio is focused on the provinces. In the long term, this is a risk, because as the population moves to cities, the credit base decreases. At the moment, the lack of competition in the provinces has given the bank the opportunity to keep the average interest rate on its lending higher than its peers.
Oma Säästöpankki has expanded its operations significantly to growth centers as well, but its market share in large cities is still small.
As a whole, the company is an attractive stimulus in the banking sector, and it has good opportunities to generate shareholder value in the future.