Profitability

Net operating profitability deteriorated in Q2. Although the net interest margin (NIM) and gross recurring margin (net interest and fee income over earning assets) increased in the Q2, rising operating costs dragged the net operating earnings down substantially in Q2. Annualized NIM rose from 4.3% in Q1 to 4.4% in Q2 and recurring earnings margin increased from 4.5% in Q1 to 5.9% in Q2, both measures demonstrate that Snoras enjoys fairly robust gross profitability. Operating costs on the other hand increased substantially in the Q2. Cost/income ratio increased from 57.2% in Q1 to 71.3% in Q2. The total profitability in Q2 was boosted by the non-recurring fair value adjustment (FVA) of Snoras’s venture capital equity investment in the Dutch sport car maker Spyker Cars N.V. (Spyker) in which Snoras acquired 29.8% stake (EUR 18.6 mn or 0.01% of Snoras’s YE07 equity) in Dec 07.

Snoras booked FVA related to its Spyker investment in Q2 amounting to 44.6%* of the investment's original acquisition costs. FVA accounted for 57%* of the H1 profit before tax (EBT). EBT/average equity decreased from 27.0% in Q1 to 16.3% in Q2, the same measure stripped of the Spyker related FVA amounted to 10.4%.

 

Assets and asset quality

Total assets increased in Q2 by 2.7% qoq and 20.5% yoy to EUR 2.47 bn. Loans increased by 14.6% qoq and 20.5% yoy in Q2. The sum of 90+ days not impaired loans and impaired loans over gross loans (NPL/GL) decreased from 2.0% in YE07 to 1.9% in 1Q08. Provisions/NPL decreased over the last two quarters from 71.3% to 52.2%.

 

Liquidity funding and capitalisation

Liquid assets/total assets increased from 35.5% in Q1 to 37.4% Q2 and Loans/deposits increased from 63.8% in Q1 to 68.1% Q2. Snoras also changed the structure of the liquid assets when liquidated most of the credits to financial institutions in favour of the cash balance. 

Deposits/non-equity funding constitutes robust and growing 86.9% while debt issue account for 4.1% of the non-equity funding. Snoras claims its willingness to issue more debt subject to positive market conditions. Capital adequacy ratio decreased from 10.7 in Q1 to 10.05 in Q2. Snoras claims preparedness to inject more capital in the coming months*.

 

Rating

Fitch changed Snoras's outlook to negative from stable on 19 August 08 and affirmed the long-term issuer default rating (IDR) at BB-, short-term IDR at B, Individual at D and Support at 4. Snoras's outstanding EUR175mn eurobond was affirmed at long-term BB-. Fitch is ready to reverse the negative outlook subject to a capital injection (the practice observed already in Nov 07). S&P’s currently sticks to its BB- rating.

 

Outlook

We consider the asset quality to be moderately positive; we however see risks in the slowdown of the Baltic economies and in that context do not perceive decreasing level of provisioning as adequate and see it rather as a response to the ailing net profitability. We regard liquidity as sufficient and funding structure as moderately positive.

We consider the underlying profitability to be loosing steam somewhat which impairs the internal capital generating power of Snoras towards the year-end. We perceive the current level of capitalisation as lagging behind the current sizable loan book growth. We however believe Snoras is able to attract further capital through an equity injection over one year. We perceive the new supply risk as moderate given current high spreads and abundant customer deposits. Based on an altered credit profile of the Snoras we change our buy recommendation on the Snoras 7% May/2010 issue of 4 July 08 from buy to sell on a 3 month horizon (spread basis), we also recommend to underweight the issue relative to the Merrill Lynch EUR High Yield Index (HEC0).

*Fitch Ratings