Alisa Bank’s total income in H fell short of our estimates, PTP slightly better than expected. Capital constraints limit near-term growth, but the outlook still remains fairly good once additional capital has been raised.
Total income below expectations, slightly better PTP
Alisa Bank’s H1 results were slightly better than anticipated on bottom-line level. Total income of EUR 8.4m was below our estimates (Evli EUR 9.5m) mainly due to the lower than estimated net fee and commission income of EUR 0.8m (Evli EUR 1.7m). Total OPEX of EUR 5.7m corresponded to our estimates and the C/I-ratio improved to 69% but still well above desired long-term levels. PTP amounted to EUR 0.4m (Evli EUR 0.1m), with lower than anticipated impairment of receivables (act./Evli EUR 2.2m/3.7m) compensating for the lower than estimated total income.
Capital constraints limiting growth in the near-term
We continue to expect to see the slow growth in H1 be reflected also in H2. The company expects income to grow in H2 compared with H1, with the impact of market interest rates in our view to be the larger driver behind growth. We currently anticipate only a small growth in the loan portfolio. The raising of additional capital remains instrumental in enabling more rapid growth of the loan book, which we are confident will happen during H2. The consumer lending environment remains slightly more challenging due to the higher interest rates and stricter lending policies and capital constraints while corporate customer lending has grown in particular due to invoice financing. We expect to see a pick-up in growth in 2024e, but current market conditions remain a challenge in achieving the annual growth target of the loan book of more than 25%, and limited OPEX growth needs to support improved bottom-line figures.
HOLD with a target price of EUR 0.37
We see no notable changes to our views on Alisa Bank due to the H1 report. 2023 is set to remain on the weaker side on growth and earnings while the company continues to build foundations for ramping up growth in the coming years.
Alisa Bank’s H1 profitability was slightly better than anticipated, with PTP at EUR 0.4m (Evli EUR 0.1m). Total income was below our expectations but lower expected and realized credit losses made up for the difference. Profits in H2 expected to increase from H1.
Alisa Bank reports its H1 results on August 18th. The loan portfolio development YTD has been flat, with growing interest rates on deposits adding pressure on H2. The growth potential remains in place, but more proof is needed. We adjust our TP to EUR 0.37 (0.40), HOLD-rating intact.
Loan portfolio development flat despite volume growth
Alisa Bank (Fellow Bank until April, 2023) will report its H1 results on August 18th. The company’s loan portfolio growth YTD has been sluggish and more or less flat at EUR 157.8m in July. This, despite a rather steady growth in monthly figures for intermediated financing, having seen a peak of nearly EUR 40m in May. Deposits have likewise remained flat, at EUR 249.4m in July. The loan book has remained mostly within the EUR 160-170m mark, which according to the company would be needed to reach positive profit levels. Our net earnings estimate is at EUR 0.1m, with uncertainty relating to realized and expected credit losses.
Growth needed to counteract increasing interest expenses
We have lowered our estimates for the remained of the year, now expecting near-zero net earnings. The challenge for Alisa Bank in our view right now is the discrepancy between the loan book and deposits. The company has been actively raising the interest on its deposits throughout H2, now at 3%. Without growth of the loan book, interest expenses will start to become a burden on earnings. Therefore, our key interest in the H1 report lies on the company’s growth outlook and more recent new products, such as the Banking-as-a-Service cooperation with Talenom.
HOLD with a target price of EUR 0.37 (0.40)
With the start-up of operations, rebranding (and expected focus on marketing), new products and lending activity remaining fairly good, despite a slower start to 2023, growth potential still remains. Awaiting more signs of growth and on our lowered estimates, we adjust our TP to EUR 0.37 (0.40), HOLD-rating intact.
Fellow Bank’s outlook for 2023 remains quite good and we expect continued growth and positive profitability to be achieved. We retain our TP of EUR 0.40 and HOLD-rating.
H2 all in all slightly below our expectations
Fellow Bank’s H2 results came in slightly below our expectations. Total income amounted to EUR 7.9m (Evli EUR 7.1m). Net income of EUR 6.6m was quite in line with expectations (Evli EUR 6.8m), while net fee and commission income of EUR 1.5m beat our expectations (Evli EUR 0.3m), affected by changes to recognition of commission fees under IFRS 15. The pre-tax profit during H2 amounted to EUR -2.3m (Evli EUR -0.7m), with the difference compared with our estimates arising mainly from larger than estimated expected and realized credit losses, with total OPEX also above our estimates. OPEX was still affected by exceptional items relating to the startup of operations of some EUR 0.7m. The total capital ratio amounted to 16.8% (target adjusted: 18% -> 16%) and H2 cost / income ratio to 76%.
Growth and positive profitability expected in 2023
Fellow Bank expects revenues to grow in 2023 and to achieve a positive profit level on a monthly basis during H1/2023. The market environment poses some threats to lending volume growth, with Fellow Bank having adopted somewhat stricter lending policies. We currently nonetheless expect solid y/y growth in 2023 mainly driven by the ramp-up focused comparison period but also good loan portfolio growth. We have further raised our 2023e PTP estimate to EUR 2.9m (1.8m) following a readjustment of the cost base assumptions. We expect 2023 to be quite busy for Fellow Bank with the launch and ramp up of new services. The company’s small business in Poland is also most likely to be divested and the further strengthening of the company’s capital is to be expected.
HOLD with a target price of EUR 0.40
Valuation upside continues to remain limited in the near-term, affected further by some market uncertainties and on 2024 estimates, compared with peer multiples, current valuation levels appear fair. We retain our TP of EUR 0.40 and HOLD-rating.
Fellow Bank’s top line figures were better than expected, while higher than expected opex and expected and realized credit losses saw earnings fall below our expectations. Positive profit levels on a monthly basis are expected to be reached during H1/2023.
Fellow Bank has met the expectations that were set out for 2022. The market environment changes provide some near-term benefits but increase uncertainty regarding the lending outlook. We adjust our TP to EUR 0.40 (EUR 0.42), HOLD-rating intact.
On track with set out expectations for 2022
Fellow Bank’s development during H2 has progressed in line with expectations set out earlier. The loan portfolio at the end of 2022 was at EUR 159.9m (target > EUR 150m). Deposits amounted to EUR 246.8m, showing an expected more modest growth. The provided funding amounts on a monthly level have also showed a slight positive trend, with the monthly average (R3m) near EUR 28m. Actions to strengthen equity were also completed as expected with the issue of an EUR 6.1m debenture loan during the fall.
Market environment development positives and negatives
The interest rate environment and macroeconomic uncertainties bring some added flavour to the mix, the effects of which we currently view as slightly net negative for Fellow Bank. The effect on near-term expected net interest income is positive, although the higher interest rates on deposits and current loan portfolio to deposit ratio reduces some of the positive impact. The interest rate hikes coupled with the macroeconomic uncertainties, however, increase the uncertainty in the growth of funding volumes going forward. The effects so far appear to have been mostly visible through somewhat stricter lending policies and higher loan loss provisions, but we foresee some increases in competition through pricing going forward. The overall financial impacts on our estimates for the coming years are not substantial through the higher expected interest income and somewhat lower growth and higher loan loss expectations.
HOLD with a target price of EUR 0.40
Fellow Bank’s investment case relies on the growth of its loan book in the coming years and the benefits of scalability. The current outlook has in our view slightly weakened, and we adjust our target price to EUR 0.40 (EUR 0.42), HOLD-rating intact.
Fellow Bank’s H1 figures were weak due to ECL changes driven by the loan book growth and non-recurring items but operatively decent. Additional capital (T2) is sought to support growth. Early growth figures look promising and profitability scaling potential remains, albeit at a slower pace than we previously expected.
Weak H1 earnings but operatively decent figures
Fellow Bank reported H1 results which operatively were slightly better than we estimated but the change in expected credit losses due to the loan book growth clearly exceeded our expectations and as such the profitability was below expectations (PTP act./Evli EUR -7.4m/-2.3m). Realized credit losses were on a moderate level (EUR 0.7m). Total income of EUR 2.4m (Evli EUR 2.8m) was skewed by the old P2P loans while NII of EUR 2.5m exceeded our expectations (Evli EUR 2.0m). Total OPEX excl. non-recurring items was quite in line with our expectations. After starting the banking operations, Fellow Bank’s business lending and consumer lending volumes increased by 49% and 35% respectively compared with the beginning of the year, supported by competitiveness of the new operating model.
Additional capital needed to support loan book growth
Fellow Bank estimates that the loss in H2 will be clearly smaller than in H1. Potential for positive monthly profit levels during H1/23 is seen, assuming a loan portfolio of around EUR 180m and the bank’s estimated cost level and lending interest margin. The total capital ratio was at 19.4% and the need for additional capital to continue growth kicked in sooner than we anticipated due to the H1 losses. Fellow Bank announced actions aiming at the issue of a Tier 2 debenture in the early autumn.
HOLD with a target price of EUR 0.42
Apart from the clear difference to our estimates in the non-cash ECL changes and the faster than anticipated need for additional capital, performance was quite as expected, and growth figures look promising. Profitability scaling due to growth ambitions appears slightly slower than we previously anticipated but intact. We retain our HOLD-rating and TP of EUR 0.42.
Fellow Bank started its banking operations in April and financial figures were accordingly burdened. Lending volumes showed positive signs aided by the new, more competitive business model. Fellow Bank started actions to strengthen the capital adequacy to support growth after the reporting period.
Fellow Bank is through its new operating model in a better position to accelerate growth and compete in new customer sub-segments. 2022 will be heavily affected by the transition but will set a foundation for clear growth and profitability improvements. We initiate coverage of Fellow Bank with a HOLD-rating and TP of EUR 0.42.
Digital bank focused on own balance sheet lending
Fellow Bank is a digital bank providing lending and banking and financial services to individuals and SME’s and offering savers a return on their deposits. Through a recent merger, the company is shifting towards lending from its own balance sheet, having been established as an international marketplace lending platform. The new operating model and cheaper form of funding in our view offers additional growth potential and improves the company’s competitiveness, which opens up potential to target new customer sub-segments.
Seeking over 25% annual growth of loan portfolio
The company’s financial targets for 2022-2026 are: annual growth of more than 25% of the loan portfolio, a return on equity of more than 15% by the end of the target period and a capital adequacy ratio of at least 18% (T1). 2022 will be a tougher year financially due to exceptional costs relating to the merger and the build up the company’s loan book. We expect the company’s financials to turn on a clearly more favourable path in 2023 with the buildup of the loan book and further new growth. We expect profitability to pick-up during 2023-2024 with the growth and scalability of the operating model and expect the ROE to improve to 13.2% by 2024.
HOLD-rating with a target price of EUR 0.42
We initiate coverage of Fellow Bank with a target price of EUR 0.42 and HOLD-rating. Valuation is currently rather stretched when comparing with peers. Fellow Bank is however still in the early stages of its planned growth phase and the near-term potential for rapid growth in our view presents a justifiable reason to stay along for the early stages of the company’s growth story.
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