No other Danish banks can compare with the results achieved at Ringkjøbing Landbobank, where efforts to keep the costs under control are in a league of their own. This is nothing new, and even though the bank’s senior management are very careful who they lend money to, the crafty businessmen from Ringkjøbing continue to find new niches that result in good customers, sky-high earnings and a low risk profile. Sweet music to our ears.
Ringkjøbing Landbobank is Denmark’s most cost-efficient bank, and you don’t earn this position by sitting back and letting things run their course. You need a skilled management team and a focus on doing business where there are prospects for long-term profits without taking on unnecessary risks. However, you need to keep the costs on a tight leash. It works – also in the world of banking.
It has become harder for banks to make money due to historically low interest rates and general limited demand for loans. When this is combined with a tightened regulatory framework and stricter requirements for provisions, the banking sector as a whole has faced challenges in their ability to achieve high returns on capital. In our opinion, it is no exaggeration to name Landbobanken national champions within banking operations, and even internationally, equals are hard to find. From 2010 to 2017, Landbobanken has increased their returns on equity before tax from almost 15.5 to almost 20 percent. This level cannot be matched by the largest Danish banks. Far from it.
In 2017, the loan book grew by more than 10 percent to almost 20 billion Danish kroner, and since 2012, it has grown by more than 9 percent annually. This is significantly higher than the Danish banking sector’s general growth. However, the net interest income fell by three percent last year, as a rising share of the money lent is estimated as having lower credit risks – which is why the earned interest rates were also lower. The core earnings grew by almost ten percent, and this was due to a very decent increase in the earnings from fees by 11 percent to 301 million Danish kroner. Since 2009, the core income has grown by more than eight percent on an annual basis.
Despite its name (Landbobanken means the “The farmers’ bank” in Danish), loans to agricultural businesses are a small and steadily declining portion of Landbobanken’s lending. At the end of 2017, the share was around seven percent. The agricultural lending in Ringkjøbing Landbobank is almost entirely lending with first priority on collateral and a low loan-to-value ratio, and this puts Landbobanken in a good position if the farmers suddenly find it hard to pay back their loans. The agricultural sector did however see very reasonable growth in earnings in 2017 where the conditions for selling their products were favourable.
Landbobanken has been careful in applying negative interest rates to their professional customers´ accounts, but as this has been introduced, it provides the opportunity for higher growth in the net interest income than for banks who introduced this earlier.
Finds and develops niche markets
It is Landbobanken’s strategy to identify niches, and after becoming experts in the area, they are more capable of assessing the risks and business opportunities when existing or potential customers get in touch. Due to this approach, the bank is now financing every fourth handover of doctors’ and dentists’ clinics, just as it recently built up a strong position in the market for the financing of car leasing companies.
The approach has been successful, and the growth in net interest rates and fees has been systematically higher than the sector’s general level of growth. We see this as an indication that it can be profitable to identify a focused business approach and not necessarily take on too much in the attempt to increase your business. At the same time, it is our assessment that this provides Landbobanken with the opportunity to only do business under conditions of transparent credit risks.
The bank is continually investigating whether there are conditions in niche markets that are changing. For example, this has meant that the financing of wind turbine projects, which as recently as 2015 amounted to 15 percent of outstanding loans, only amounts to 11 percent today. The reason for this is that there has been changes to the guarantee-schemes for energy prices in these kinds of projects, and this has reduced the long-term predictability in the projects’ ability to generate cash flows, and thus, increased the inherent risks for the provider of the loans.
Despite a significant expansion outside of the local areas in Western Jutland, the bank has not seen any serious credit losses outside of the local area. We see this as a clear indication of a good credit culture, as local or regional banks are often seen to experience credit losses when they enter new geographic regions.
Landbobanken makes sure to engage the right customers, which is to be understood as either customers with savings surplus and no credit risks or lending to customers with a number of assets that can be used for collateral. Over the last few years, this approach has included increasing investments in expanding the bank’s private banking competencies. In this context, the opening of an office in Holte, north of Copenhagen, where the Regional Director, Stig Haldan, is in our view creating a good growth rate in the number of current customers and is continually expanding the network of potential customers.
Good bank customers are also customers with enough money to allow Landbobanken to achieve economies of scale. The costs per bank customer are relatively stable, and incremental business thus often equal incremental margins. As previously mentioned, Landbobanken is Denmark’s most cost-effective bank. The costs thus amounted to less than 33 percent of net interest income and fees in 2017.
Rising dividends on the horizon as a result of conservative fund re-transfers
The executive board of Landbobanken consists of John Fisker and Jørn Nielsen. John Fisker has been the CEO since 2012, and the 52-year-old CEO runs the bank with a high level of energy and a perpetual focus on limiting unnecessary costs and finding new opportunities for profitable, low-risk business. Jørn Nielsen has been part of the executive board since 2015, but he has been Director of Credit since 2009. The collaboration between the two has thus been close for a number of years, and in particular since John Fisker assumed the helm after Bent Naur’s exit.
The senior management is conservative in its ongoing provisions for covering future losses on lending, and today, the provisions amount to approximately four percent of the outstanding loans. Despite the high quality of the customers, there has not previously been any reserve-releases as has been the case for most of the large Danish financial institutions over the last few years. In our assessment there is a great likelihood of this happening in the current financial year where Landbobanken has no realised losses and a large reserve account. Drawing down the reserves would be positive for the capital base in the bank, and by extension, also the future basis for potential dividends to the shareholders.
Landbobanken is heavily capitalised with a so-called core ratio of 16.5 percent of risk-weighted assets based on the standard method. This is higher than the senior management would like, and we therefore expect that this percentage will decrease over the next few years through a combination of more activity and continued increases in dividend payouts to shareholders.
For the financial year 2017, Landbobanken paid nine Danish kroner per share in dividends, amounting to a direct yield of almost three percent. In addition to this, the bank will buy back shares worth of a total of 170 million Danish kroner, and the total payment to shareholders thus amounts to around five percent of the market value of the company. From 2013 to 2017, the shareholder distributions in the form of dividends and share buybacks grew by almost 17 percent a year, and we expect that there will also be significant increases in the dividend payments to shareholders in the future.
The quality of a bank can be hard to assess in periods where the business cycle is in an upswing wherein more borrowers are able to pay their interest and principal repayments on time and where the assets seem to be continually rising. All of this can lead to the illusion of everything being safe investments. It is in the tough times, however, when the business cycle is in a slump that a good bank really shines. Landbobanken did well for itself during the last financial crisis, and it got through it without having to take any hybrid loans from the government to finance its operations. There are few banks in the world that we find worth investing in – but Landbobanken is certainly one of them.