ING and CASA – Beacons in the Dark: Jefferies

ING and CASA – Beacons in the Dark: Jefferies

During the third quarter, ING Groep NV (ADR) (NYSE:ING) is set to benefit from NIM, while Credit Agricole SA (EPA:ACA) (OTCMKTS:CRARY)’s CET1 will be improved. Accordingly, Jefferies analysts have assigned a ‘Buy’ rating on both banks

Omar Fall and the team at Jefferies in their research note dated October 21, 2014, titled: “ING and CASA – Beacons in the Dark” point out all three French banks viz.: Grupo Casa Saba, S.A. (ADR) (OTCMKTS:GCSAY), BNP Paribas SA (EPA:BNP) (OTCMKTS:BNPQY), and Societe Generale SA (EPA:GLE) (OTCMKTS:SCGLY) have recently experienced sizable gains through their Available for Sale (AFS) portfolio.

ING’s NIM would continue to expand

The Jefferies analysts mention that they had been concerned that the rapid NIM expansion witnessed at ING Groep NV (ADR) (NYSE:ING) post-crisis was nearing an end. One of the reasons for the analysts’ concern was that ING has already cut deposit rates so heavily. This, along with re-pricing of commercial banking assets, has been the primary driver of the upswing witnessed in NIM.

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The analysts think the longer term prospects for NIM are positive as the ING group re-risks the asset side of the balance sheet by growing higher margin products where ING is currently underweight. However, the analysts believe this will take time as the group is starting from a low base in areas such as SME/ consumer lending.

The Jefferies analysts point out that at a recent conference, management highlighted significant further falls in deposit rates into 3Q and beyond. As can be evidenced from the following graph, savings rates in core countries (the Netherlands, Germany and Belgium) have been cut:

Fall and his colleagues at Jefferies point out though it’s difficult to precisely model the impact these rate cuts will have, by running a regression of ING Groep NV (ADR) (NYSE:ING)’s net interest margin against system deposit rates in the core countries on a quarterly basis, the analysts observed a considerable correlation of some 70%:

NIM Vs Depsoit Rates

The analysts also note there is another positive tailwind to NIM to come from lower funding costs on newly issued debt. As set forth in the following chart, ING’s funding costs on long term debt have been decreasing over the past three years:

Drop in funding cost

Jefferies’ €14 GGM-driven price target on ING Groep NV (ADR) (NYSE:ING) is based on a look through TNAV of  €10.3, sustainable RoTE of 13% and CoE of 10%.

CASA’s CET1 set to rise

While initiating a ‘buy’ coverage on Grupo Casa Saba, S.A. (ADR) (OTCMKTS:GCSAY), the Jefferies analysts note CASA’s CET1 has been rebuilt faster than French peers. Moreover, unrealized gains taken directly to equity are now recognized as contributing to common equity tier 1. They point out that majority of such gains or losses stem from the Available for Sale (AFS) portfolio. As set forth in the following table, in recent times, all three French banks have experienced sizeable gains through these AFS portfolios:

CASA AFS gain or loss for French banks

Fall et al. note though BNP Paribas SA (EPA:BNP) has benefited the most in absolute terms given its size, the impact on Grupo Casa Saba, S.A. (ADR) (OTCMKTS:GCSAY)’s CET1 ratio has been the greatest. The Jefferies analysts point out that CASA’s €3 billion of AFS gains currently on the balance sheet are proportionately larger than peers, though other banks are also certainly beneficiaries of sizable gains:

CASA Breakdown of CET1

The Jefferies team points out that when added to the potential for organic capital generation, CASA would continue to outpace peers in terms of CET1 build. As can be deduced from the following chart, CASA has over a third of its earnings exposure from low capital intensive asset gathering:

CASA PBT breakdown

The analysts anticipate Grupo Casa Saba, S.A. (ADR) (OTCMKTS:GCSAY) will also benefit from an ongoing swift capital rebuild, aided by further AFS gains. They have assigned a “Buy” rating on CASA with a price target of €14.5.

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