Sogn Sparebank (Ticker: Sogn)
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Sogn Sparebank
Small Norwegian savings bank
Disclaimer
The writer of this analysis owns Equity Certificates (EC) in the company. This analysis is not financial advice. EC’s have been accumulated between 100 to 102 NOK
(all figures in NOK if not specified)
About Sogn Sparebank (SOGN)
The bank is the result of the merger of three banks in April 2019. The bank has roots back to 1846. The bank has seven offices on the west coast of Norway. The bank is a part of the Eika Alliance, the Alliance purchases IT systems provide different products (insurances, loan products, etc.).The main customer group of the bank is private individuals wanting to fund their house in the local area. 68% is private individuals, 23% companies & farmers and the remaining is loans to the public sector.
Main risks
Risk factors are usually the ones you do not think about, this is well illustrated by Nassim Taleb in Black Swan, where a casino considered its biggest risks such as cheating, luck for a big gambler, and robbery. These are typical things you know about and want to get insurance against and take action against, what actually caused the casino major losses was among other things, a lion tamer eaten by the lion and a dissatisfied employee who tried to blow up the casino.The main risk I can see as of today
· Slow down effecting the local employment and housing prices
· Online banking growth accelerating
· Continuing stable low interest might put pressure on margins
· Not being able to cut cost and continuing high losses on loans
· The statistic agency in Norway estimates that about 20% of the people in some of the smaller places they are targeting are leaving for bigger cities by 2050.
The Numbers
*2020 Q3 is 9M figures
The merger happened in 2019, so the figures prior is a combination of the three merging banks. In 2020 about 7,5m of the losses come from COVID 19 provisions and in Q4 they will take a provision of 8,4m for voluntary severance packages. In 2019 they had a loss of 22,2m mainly connected to a specific business engagement and they had roughly 10m in extra cost from the merger.
The bank is very conservatively with the highest core capital ratio of any listed Norwegian bank.
Management
Mads Arnfinn Indrehus has led the bank since the merger in 2019, he came from the position of one of the merging banks (Vik). He has put in place a staff reduction and optimized the offices some.
They have about 60 people on the different boards of the bank, this excessive structure is in place as all of the three merging banks wanted to keep influence.
Industry
If you are interested in Savings banks I would suggest subscribing to Norne’s newsletters (https://norne.no/). Sogn is the cheapest on P/B and has the highest CET ratio. However, profitability has been miserable, much due naturally to the high capital reserves and small scale of the operations. And need for many physical offices because of the geography in the region with large distances.
Investment thesis
· If they use some more of their balance sheet and get CET ratios closer to their competitors the net profit could increase by about 20m.· The effect of down staffing will start to take effect in 2021, since they offered voluntary packages in 2020, and full effect from Q4. This is related to 11 employees, so I would estimate an effect of at least 5m in 2022.
· Local bank mergers in Norway have normally been quite successful since it eliminates local competition and the synergies are quite easy to execute on overtime (reduction of offices, smaller administration as a percentage of money given out, and a larger balance sheet).
Sources
https://norne.no/Great analysis!
Really enjoyed the ” Main risks chapter”!
A comment to the part where you write:
“However, profitability has been miserable, much due naturally to the high capital reserves and small scale of the operations. And need for many physical offices because of the geography in the region with large distances.”Do you see this changing in the future or is it still cheap considering no change in profitability?
Great question, if nothing improves you get 6/7% ish, so then you could do better in the other savings banks (but a bit safer in Sogn since they have so high capital ratio).
Wanted to expand a bit on management. A bad manager can really f… up a bank (or insurance company).
“Mads Arnfinn Indrehus has led the bank since the merger in 2019, he came from the position of one of the merging banks (Vik). He has put in place a staff reduction and optimized the offices some.”
Just listed to Focused Compounding, and they had a good point about not wanting to invest in bank CEOs that got in trouble in 2008. For an IT founder to formerly have failed is okay, maybe even preferable, but to have taken an excessive risk in a bank is another matter.
Mads Arnfinn Indrehus has been the CEO of Vik Sparebank since 2001. Therefore, I took a dive into Vik’s older annual reports.
Their losses did not spike in 2008/2009, and their profit was also quite stable.
They did a decent job at cutting cost per NOK loaned out, however, so did the rest of the industry. I would imagine digitalization and in general larger loans contributed:
https://sognbank.no/-/media/banker/sognsparebank/Investor-Relation/Vik-2014.pdf
https://www.youtube.com/watch?v=-BecQrVmFI8&ab_channel=FocusedCompounding
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