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CFA Institute Research Challenge
hosted by
CFA Society Romania Alexandru Ioan Cuza University of Iasi
Current Price: RON 1.737 Recommendation: HOLD
EUR/RON: 4.5239 Price Target: RON 1.7
2012 A 2013 A 2014 F 2015 F 2016 F 2017 F 2018 F
Profit for the year 320.4 374.9 441.7 520.8 649.1 776.4 896.4
ROaE 12.78% 12.98% 13.37% 13.76% 14.86% 15.28% 15.15%
ROaA 1.16% 1.22% 1.32% 1.42% 1.64% 1.84% 1.98%
Source: Company data, team estimates Highlights
We issue a hold recommendation with a target price of RON 1.7 per share. We consider
TLV shares to be fairly priced by the market at the current level of RON 1.737, as the future
positive evolution of the bank is already taken into account by investors.
Competitive positioning. Banca Transilvania (“BT”) is third bank in Romania by market
share. It declares that it applies conservative provisioning – we have our doubt here and we are
concerned about underprovisioning, but given the improving economic perspectives of Romania,
we believe BT can smooth out the actual underperforming loans – and reports lower Deposits/Loan
ratio than the Romanian banking sector, which is a clear positive point. BT is a stable bank
emphasizing organic growth: 14% CAGR in deposits in 2009-2013 years, which is higher than the
banking sector (7.5%). Also it is a blue chip on Bucharest Stock Exchange, and this helps with the
public perception. BT outperformed market index for both short-term and long-term for 1997-2013
period.
Financial position. The preliminary results for 2013 show a net profit of RON 374.9m, a 17%
yoy increase. With a new CEO focused on growth rather than on restructuring, BT is one of the few
banks in Romania that can accelerate loans generation due to less constraints from a parent bank
bound to tighter capital requirements. Nonperforming loans ratio increased for the last 2 years, but
for now it remains below sector’s average.
Main risk issues. Competition risk is high due to existence of other dominant players in the
market, but BT position is strong in their core market – SMEs. Macroeconomic factors are also
sources of risk, as there are important factors of financial intermediation development. However, as
economic growth in Europe recovers, the peripheral countries as Romania should benefit both in
terms of real trade flows and on investors’ perception.
Source: Team estimates
1
1.1
1.2
1.3
1.4
1.5
1.6
1.7
1.8Banca Transilvania S.A. daily stock prices (RON)
Closing priceCurrent priceTarget price
2.13% downside
Alexandru Ioan Cuza University of Iasi
Student Research
This report is published for educational
purposes only by students competing in the
CFA Institute Research Challenge.
[Financial Intermediation/Banking] Banca Transilvania S.A. Ticker: TLV Exchange: BSE
Date: 20.02.2014
Market Profile
52-week price
range 1.1610 – 1.7480
Average daily
volume 277,947,581
Shares
outstanding 2,206,436,324
Market
Capitalization 3,830,373,458.46
Book value per
share 1.00
Return on
Equity (2014F) 13.37%
P/BV 1.42
Source: Team estimates, BSE
Valuation
Residual
Income
model
Justified
P/BV
model
Estimated
price 1.68 1.72
Weights 50% 50%
Target
Price 1.7
Source: Team Estimates
1.7
1.737
CFA Institute Research Challenge 20.02.14
2
Business Description
Banca Transilvania S.A. was incorporated in Romania in 1993 and started its activity in 1994. Its
main operations involve banking services for companies and individuals. The Bank carries its
activity through its Headquarters in Cluj-Napoca and 63 branches, 445 agencies, 31 bank units, 10
Healthcare Division units located throughout the country and 1 regional center located in
Bucharest. Banca Transilvania S.A. is the parent company in Banca Transilvania Financial Group
created in 2003. The group’s core business is run through Banca Transilvania S.A. (generating
92.4% of the Group Net Income and 93.7% of Operating Income in year 2012). In 1997 Banca
Transilvania became the first Romanian banking institution listed on the Bucharest Stock
Exchange. In 2012 BT was ranked #3 in the banking system of Romania with a market share 8.08%
in terms of assets (this ranking is distorted due to the fact that major banks with foreign holding
companies use securitization or transferred a part of their loans abroad in order to optimize the
balance sheet), #3 largest issuer of credit/debit cards in Romania, #1 Visa card issuer in Romania,
#1 in premium cards.
Business lines of BT are Corporate Banking, Retail Banking, Small and Medium Enterprises
(SMEs) and Healthcare Division (“HD”). Corporate Clients portfolio is well diversified in terms of
type and industry exposure. Trade industry is slowly declining while manufacturing and agriculture
are advancing. In 2012 the Corporate loan portfolio increased by 15% reaching 49% of bank’s total
loans. Retail banking client portfolio share is the biggest one and increased by 8% in 2012.
SME banking is a business line which generates new product packages, so it is attracting more and
more clients. In 2012 the “First Year Free Account”, “Offer for self-employed” and “Fast
factoring” packages were successfully launched. Retail Banking has a dominant share of
customers, while SME and Corporate Banking have only 10% of customers, however their
operating margin (based on total expenses less net impairment losses for assets, other contingencies
and loan commitments) is higher than in Retail Banking by 10% (see Figure 2).
Healthcare Division has virtually no competition from other banks in offering specialised banking
services for the medical sector. Healthcare Division’s active clients are exceeding 25,000, making
up for about 45% of market share. This position is due to a dedicated team for doctors, 9
specialised units, a Special Credit Scoring System and the first credit card only for doctors.
BT Current strategy is based on the following main cornerstones:
Bank for entrepreneurial people. BT’s main strategy is to keep its image of having the widest
range of products and services for SMEs. The main pillars of BT approach from this
perspective are stable relationships with customers, flexibility and diversity of the credit
portfolio. (See Appendix 7 for the dispersion of loan portfolio of BT).
Conservatism. BT declares that it applies conservative provisioning policy emphasizing
stability, high liquidity and organic growth. BT’s loan/deposit ratio is lower than Romanian
banking sector’s average (See Figure 3), below 75% objective was set for year 2013 by BT
management.
Visibility. Despite the tendency to reduce marketing budgets for cost control, BT has increased
its input in this field. During 2012 BT moved from 8th to 5th position in TV advertiser’s
ranking. BT’s visibility increased by nearly 60% during the year 2012, as BT’s communication
share increased from 5% (year 2011) to 8% in year 2012.
Innovations. BT and especially the retail banking business line acts in accordance with a
leader’s position in technology and innovation. BT was first to launch Western Union money
transfer service through Internet banking in Romania. BT and Western Union were first to
launch money transfer service through ATM in the world. In 2012 BT started the
implementation process of a new core-banking system, Flexube by Oracle. The new system,
started to work successfully in January 2013 (See Appendix 8 for advantages of the new
system).
Shareholders structure. The bank’s strategy is supported by a solid shareholder bases: the
European Bank for Reconstruction and Development, holding 14.61% of the bank’s share capital,
the Bank of Cyprus (9.98%) and IFC – the Investment Division of the World Bank – holding
3.53%. Romanian investors hold 45.03% of shares, while foreign investors hold 54.97%. Romanian
individual investors hold 20.2% of shares. A Romanian institutional investor who holds more than
5% is Investment Company SIF MOLDOVA S.A. Another investment company, SIF OLTENIA
S.A. holds 4.96% of shares.
Figure 1: BT Clients Structure
Retail Banking
Corporate Banking
Healthcare Division SME
Source: Company data
Figure 2: Income & Expense
distribution in BT business lines
Total Income
Total Expense Operating Margin
Source: Company data
Figure 3: Loans as % of Deposits
BT Romanian Banking Sector Source: Company data, National Bank
of Romania (NBR)
Figure 4: Shareholders structure
Romanian individual investors Romanian institutional investors Foreign individual investors Foreign institutional investors
Source: Company data
1%
89%
1% 9%
52% 52%42%
40%
0%
10%
20%
30%
40%
50%
60%
0
100
200
300
400
500
600
Co
rpo
rate
Ban
kin
g
SME
Ret
ail
He
alth
care
Div
isio
n
110% 111% 107%
0%
20%
40%
60%
80%
100%
120%
2010 2011 2012
20.2%
24.8%
02.4%
52.6%
CFA Institute Research Challenge 20.02.14
3
Industry Overview and Competitive Positioning
Macroeconomic analysis
Real GDP growth rate is a dominant factor of financial intermediation development. First 3
quarters of 2013 showed a stable economy expansion, which is positive sign for banking sector
both from loans and deposits growth perspective. (See Figure 5, Appendixes 9, 10, 11 for details).
Inflation. The National Bank of Romania’s (NBR) primary objective is to ensure and maintain
price stability. The NBR shifted to direct inflation targeting in August 2005. The annual Consumer
Price Index (CPI) reached 24-year low at the end 2013 Q4, falling close to the lower bound of the
target range which is 1.5 – 3.5% (See Figure 6).
Unemployment rate in Romania is lower than that of the neighboring countries. The stability of
the country from the perspective of labor market can be considered as satisfactory, as the rate was
stable for 2012 and 2013 (7% and 7.2% respectively), whereas median for EU countries for 2012
and 2013 was 10.15% and 10.2% respectively (See Appendix 12 and 13 for details).
Exchange rate regime in Romania is classified as managed floating. Exchange rate EUR/RON is
an important factor in the banking industry as loans to the private sector in foreign currency are
prevailing in Romania’s banking sector. The historical data shows fluctuation of exchange rate in
certain limits which are observable and controllable (See Appendix 14 and 15 for details).
Investments and Savings. Investment rate and saving rate are important macro drivers of the
banking industry. High investment rate indicates high rate of lending to the private sector and high
saving rate will bring opportunity of deposit increase. From this view Romania is in a healthy
position because the investment rate was higher than the average in EU in 2012. It was the highest
among EU countries from 2009 to 2012 (See Appendix 16 and 17 for details).
Money supply. Money supply has increased. Broad Money M3 increased by 8.8% during 2012-
2013, Narrow Money M1 increased by 12.7 % and its component Currency in Circulation by
10.5% (See Appendix 18).
Analysis of Romanian macro climate leads to the conclusion that the banking system is not only
stable, but also has good perspectives of growth along with the overall economic activity.
Industry overview
Regulations. The National Bank of Romania (“NBR”) is the authority in charge of the regulation,
licensing and prudential supervision of credit institutions including banks, credit cooperative
organizations, saving banks for housing and mortgage banks. NBR sets up regulations regarding
the minimum amount of funds, capital and risk management, operations etc. NBR shall not grant
authorization to a credit institution if the credit institution does not possess own funds or initial
capital no less than an amount equivalent in RON of EUR 5 million. A credit institution’s own
funds may not fall below the amount of initial capital required at the time of its authorization.
Credit Institutions should provide own funds that are at all times equal to or exceeding the sum of
capital requirements established for the mitigation of the following risks: credit risk, including the
counter-party credit risk, position risk, settlement/delivery risk, foreign exchange risk, commodities
risk and operational risk, as applicable. The required capital for credit risk in respect of all of their
business activities with the exception of their trading book business is 8% of the risk-weighted
exposure.
Banking coverage. Romania is the 8th among the European Union countries by population,
however banking coverage is low. The number of banks per 100,000 people is 0.19 and is the
lowest among EU countries where the average and median are respectively 3.45 and 1.62.
Meanwhile the network of branches is not the lowest one, there are 27 branches per 100,000
inhabitants and EU-27 median is 33. BT has 2.57 branches per 100,000 inhabitants meaning
approximately 10% of banks network. This is a significant result taking into consideration the
number of credit institutions in Romania which is 40 (2012) from which 39 are banks. The number
of branches and bank employees show dramatic increase until December 2008, however in last 3
years the tendency of cost control brought decreases in the number of employees and branches.
Currently the number of bank employees is lower than the pre-crisis level, however the number of
branches is equal with the pre-crisis one (See Appendixes 19, 20 and 21 for details).
Concentration of banks. According to the Herfindahl-Hirschmann index calculated for banking
sector, the sector can be described as non-concentrated. According to the index by assets, the
banking sector can be described as a composition of approximately 12 banks of the same size. The
value of this index for Romania is lower than EU average. The share of the top five banks in
banking sector by assets, loans and deposits is 54%, 55.9% and 53.5% respectively (See Appendix
22 and 23 for details).
Shareholding structure of the banking system. The Romanian banking sector is dominated by
foreign capital. By Aug 2013 the assets of foreign-owned credit institutions represented a 90.8%
share of the total assets of the Romanian banking sector. This fact speaks both about attractiveness
Figure 5: Real GDP Growth Rate
of Romania
Source: NIS
Figure 6: CPI annual change %
Annual inflation rate Upper bound
Lower bound
Source: NIS
Figure 7: Capital Adequacy
indicators
Solvency ratio (%)
Tier 1 capital ratio for credit risk (%)
Minimum requirement for
Solvency ratio (%)
Source: NBR
Figure 8: Banking sector performance
Net Profit/Net Loss (RON bn.)
ROE (%)
Source: NBR
%
-10
-5
0
5
10
01234567
4
8
12
16
20
24
2004
2006
Mar
/200
8
Sep
/200
8
Mar
/200
9
Sep
/200
9
Mar
/201
0
Sep
/201
0
Mar
/201
1
Sep
/201
1
Mar
/201
2
Sep
/201
2
Mar
/201
3
-10.0%
-5.0%
0.0%
5.0%
10.0%
15.0%
20.0%
-3.00
-2.00
-1.00
0.00
1.00
2.00
3.00
4.00
5.00
Bln. RON
CFA Institute Research Challenge 20.02.14
4
of banking sector for foreign investments and about the sensitivity of banking sector to abroad
changes. The capital share of the banking industry by country of origin is concentrated in the
following countries: Austria, France, Greece and The Netherlands. The international shareholders’
base means a knowhow injection from more developed banking systems. The number of banks
with a majority of foreign capital is 36 from the total of 41 credit institutions by Aug 2013 (See
Appendix 24 for details). The liabilities of the banking sector are less exposed to foreign sources.
The main source of financing are household and corporate deposits which with capital and reserves
add up to app. 70% of liabilities (See Appendix 25)
Loans, Deposits, Assets. The transmission of GDP growth to banking sector will be lower if the
country has a low level of financial intermediation. Romania has the lowest level of financial
intermediation calculated by 3 main ratios: Assets/GDP, Loans/GDP and Deposits/GDP. This is
mainly due to a large share of the population living in rural areas with limited access to banking
services, so probably this measure is not relevant at country level and it should be measured
separately for rural and urban areas. However, Deposit/GDP ratio is stable, with growth
perspectives (See Appendix 26 for details). The total value of loans to households is stable for the
last two years; however, the components differ in their evolution. The amount of consumer loans is
showing a decreasing trend, meanwhile mortgages are increasing due to Government “First Home”
Program (See Appendix 27).
Capital Adequacy indicators of the banking sector are satisfactory. Solvency ratio as per Basel
rules had a stable dynamic during the last 2 years. The banks distribution based on solvency ratio
shows that the biggest concentration is within 12-16% interval with total assets of 69% as of June
2013 (See Appendix 28 for details). Capital adequacy is a strong characteristic of the Romanian
banking system, which is ready for implementation of the Basel III regulations. The level of Tier 1
capital ratio is very close to that of the solvency ratio, which reflects the high quality of own funds
of the banks, as well as their capacity to withstand shocks. Non-performing loan ratio is calculated
as a ratio of loans overdue for more than 90 days to total loans. This ratio is definitely high for the
Romanian banking – 20.3% as of June 2013 (See Appendix 29). The return on equity of credit
institutions comes back to positive territory during 2013, reporting 5.9% on Aug 2013 and overall
the industry reported net income of 1.53 billion RON. The distribution of credit institutions’ assets
by ROA level for year 2012 shows concentration of 60% assets with negative ROA, however the
results for 2013 should be more satisfactory, as ROA for Sep 2013 was 0.55% (See Appendix 30).
Banking sector statistics relating to the daily transactions of banks are growing for the last 5 years
(See Appendix 31 for details).
Competitive positioning
BT is in the top 5 Romanian banks, which control over 54% of the banking sector. The peer group
selected for comparison consists of BCR, BRD and UniCredit Tiriac Bank, based on the position
within the banking system and data availability.
Assets comparison. BT has the lowest Loan/Deposit ratio among the banks. This fact can be
viewed as an advantage, on the other hand BT has less sources of funding than other 3 banks which
are part of international groups, so it needs to be more cautious – BRD and BT have increased their
deposits in H1 2013 by 4.27% and 4.012% respectively.
Performance comparison. Four banks reported net profit as of June 2013. The two leading banks,
BCR and BRD, did not have Net Interest Income (NII) increases as of June 2013 compared to Dec
2012, and BT and UniCredit Tiriac Bank had respectively 9.19% and 12% increases. Operating
income of the leading 3 banks decreased in H1 2013 yoy, BT minimizing this decrease by higher
increase in NII. BT has the highest NII/ Total operating Income ratio by H1 2013 counting 70.63%.
This is a negative situation as banks try to diversify their income sources away from NII so they are
not so exposed to interest rate risk. Cost to Income ratio for the peer group is within the range of
45-53%. BRD has the largest network distribution (See Figure 12). BCR, BRD and BT have
decreased their advertising expenses in H1 2013 while UniCredit Tiriac Bank had a significant
increase of 12%. BT and BRD motivate their staff by distributing stocks for productivity and
fidelity: allocating for this 14.48 % and 5.69% respectively of personnel expenses.
Stock market BT is the first bank to be listed in Bucharest stock exchange. BT contributes to BET
index by weight 21.15% that is the highest by January 2014. Three other banks (Society Generale
BRD, Banca Comerciala Carpatica S.A. (“BCC”) and Erste Group Bank AG (“EBS”) that controls
BCR) are listed on BVB. However, from this perspective, only BRD is a relevant comparison term
for BT, as BCC only holds 1.29% of all banking sector assets and Erste Group Bank AG represents
Austrian Group with operations in 7 countries. BT outperformed the market both in long-term and
short-term. It outperformed BRD since BRD’s listing in terms of returns and for the last 52 weeks
BT traded 12.59% of all it shares, showing higher liquidity than BRD, BCC and EBS which traded
respectively 9.34%, 9.05% and 0.79% of their shares. However, the comparison is not entirely
relevant for Erste as it is listed also on Vienna (main market) and Prague stock exchange (See
Appendixes 33, 34 and 35 for details).
Figure 9: Assets, Loans and
Deposits of Banking sector
Assets/GDP
Loans/GDP
Deposits/GDP
Source: NBR
Figure 10: Cost to income
ratio
BCR
BRD
UniCredit Tiriac Bank
BT
Source: Company data
Figure 11: Loans and deposits
relation
Loan/Deposit ratio
Deposits from customers/Total Liabilities ratio
Source: Company data
Figure 12: Branches
Source: Company data
0%
20%
40%
60%
80%
48.10%
45.40%45.02%
46.80%
46.10%
52.91% 52.22%
49.50%
2013 2012 2013 2012 2013 2012 2013 2012
0.00%
20.00%
40.00%
60.00%
80.00%
100.00%
120.00%
140.00%
BCR BRD BT UniCreditTiriacbank
602889
550
189
BCR BRD TLV UnicreditTiriac
CFA Institute Research Challenge 20.02.14
5
Investment Summary
Fundamentals based valuation indicate a HOLD recommendation Based on our valuation of the bank, we issue a HOLD recommendation for BT, with a target price
of RON 1.70. We consider that TLV shares are fairly priced by the market at the current level of
RON 1.71, as the future positive evolution of the bank is already taken into account by investors. In
the last 12 months, TLV share price increased from RON 1.42, outperforming the BET Index.
Valuation methods
Our 12M TP price was determined by combining Residual Income and Justified P/BV models with
equal weights. In our opinion, these models are the most appropriate for valuing BT, since the bank
does not pay dividends.
Ambitious growth objectives
With a new CEO focused on growing the company, BT has a market share target of 10-11% for
2015-2016. This growth is expected to come mostly from new business, as BT continues lending
while many of its peers are deleveraging. BT has positioned itself as the SME Bank in Romania,
offering over 20 specialized products for this sector and gaining a 15% market share with over
200,000 active clients. There is significant growth potential on this client base, as only 10% of
SMEs currently have loans. BT has also a well-diversified portfolio of corporate clients, in terms of
both type and industry exposure. While financing for trade is declining, manufacturing and
agriculture are advancing. In the retail sector, the bank’s objective is to consolidate its Top 3
position in cards and to generate more revenues from operational products and value added
services.
BT has a good geographical coverage in terms of branches, being able to serve new and existing
clients without making significant new investments in fixed assets. BT has especially good
coverage in the Transylvania region, which was less affected by the financial crisis and where the
economy is developing at a faster pace than the rest of the country. The bank’s strategy for growth
includes opening branches outside Romania, in countries like Italy and Spain, where the numerous
Romanian immigrants form a large potential client base.
In the 2009-2013 period, BT has been consistently growing at a much faster rate than the Romanian
economy, with a CAGR of 13.4% for total assets and a CAGR of 11.8% for gross loans. In order to
sustain this growth rates, BT has not paid cash dividends since 2009, preferring stock dividends as
a solution for organic growth. The solvency ratio has increased as a consequence, but it remains
below the banking system average, due to the even faster increase in gross loans.
Nonperforming loans ratio below sector’s average
The nonperforming loans ratios reported by BT have increased in the past 3 years, up to 12.57% of
gross loans for 12/2013, however still below the sector’s average. The coverage ratio has also
increased to 122.4%, the value of net impairment losses on assets having a significant impact on
the size of the reported net profit. BT officials declared that the bank is very well provisioned,
which will increase net profits in future years, if economic conditions improve and some of the
nonperforming loans will be repaid. On the other hand, if NPL ratio continues to increase and
catches up with the sector’s average ratio, the profitability of BT will be drastically affected, as the
bank is currently very sensible to the cost of risk.
Deposits from customers provide the necessary financing
Customer deposits provide most of the funds needed for the banks operations. In 2013, deposits
from customers accounted for over 80% of total assets and over 89% of total liabilities. Most
deposits and loans are in RON, so there is only a small mismatch between the available and
necessary financing resources, limiting the bank’s foreign exchange exposure.
BT corporate governance is rated high
BT receives a score of 9 out of 10 related to the Principles of Corporate Governance as developed
by the Organization for Economic Cooperation and Development. The main issues identified are
the fact that the Board of Directors does not include any independent members and that these
members are elected for a period of 4 years, instead of just one year as recommended.
Figure 13: Market share by assets
Market share by assets Dec-12 Market share by assets Q1-2013
Source: Company data
Figure 14: Geographic coverage
Source: Company data
19.0%
12.7%
8.5%6.7%
6.5%7.1%
4.3%
4.6%3.8%
3.3%
0.00%
5.00%
10.00%
15.00%
20.00%
25.00%
CFA Institute Research Challenge 20.02.14
6
Valuation
We evaluated BT using two models: Residual Income Model (RIM) and Justified P/BV Model.
The Residual Income valuation model
This approach is suitable for BT as the company does not pay dividends. Other advantages of the
model are that it is driven by publicly available accounting data and the terminal value is less
significant when compared to other models, therefore it is providing greater certainty in the
valuation.
This model is built on the assumption that the value of a company is equal to the capital invested
plus what is created in excess of the cost of equity. The larger the difference between the ROE and
the required rate of return given the risk of the company, the higher the value of the firm. Therefore
this model shows the opportunity cost of investing in a share of BT. According to our detailed RIM
analysis we determined the target price of RON 1.68 (See Appendix 4 for details).
The Justified P/BV model
The model uses long-term sustainable figures of ROE, growth and cost of equity. The model is
based on Gordon’s growth model and its results depend on the total equity value from the last
forecasted year and the P/BV ratio computed using the long-term values mentioned earlier. We
estimated a target price of RON1.72 (See Appendix 4 for details).
Key drivers and outlook
We have constructed our models by incorporating estimations for 2014-2018F, following
2013 IFRS preliminary individual (only the bank) financial results released by BT. Models
are mostly sensitive to the following factors:
Loans/deposits ratio is estimated to be maintained below 75% for 2014-18F.
Significant growth of clients’ loans, but at a lower rate than in previous years.
Interest rates are expected to decrease for both loans and deposits.
A sustainable growth rate (g) of 3%, which approximates Romania’s long-term GDP growth.
We assume that the bank will not pay dividends
Cost of Equity
The Cost of Equity was calculated with CAPM model. Our risk-free rate is based on YTM
Romanian government bonds for the explicit forecast (2014-2018F) and on YTM 30yrs German
Government bond plus an estimated inflation differential between Germany and Romania for
perpetuity. We calculated a beta of 1.16 from the regression between TLV and BET index and then
adjusted it using Bloomberg formula, obtaining the value of 1.11 (See Appendix 36 for details).
The expected market return of 9.13% is the sum of market and country risk premium (based on
Damodaran’s estimation1). Thus, we have computed the cost of equity, which ranges between
13.77% and 14.84% and a perpetuity cost of equity of 13.36% (See Appendix 6 for details).
Sensitivity analysis for Justified P/BV
We examined the sensitivity of Justified P/BV model to changes in key long-term assumptions. A
100bp change in the long-term ROE affects the 12M target price by ca. 9%, while a change in the
long-term growth rate has a lesser impact on the 12M target price, all other factors being constant.
The estimated long-term ROE has a value which is not significantly higher than the perpetuity cost
of equity, so growing the company in the long term is not expected to increase its value, unless the
efficiency of operations is improved first.
Analyzing the variation in target price as a function of ROE and perpetuity cost of equity shows
that a 50bp change in the cost of equity affects the 12M target price by ca. 5%, all other factors
being constant.
Table 1: Justified P/BV sensitivity analysis
LT ROE LT growth rate Cost of equity - perpetuity
1.00% 2.00% 3.00% 4.00% 5.00% 12.36% 12.86% 13.36% 13.86% 14.36%
11.5% 1.44 1.42 1.39 1.36 1.32 1.54 1.46 1.39 1.33 1.27
12.5% 1.58 1.57 1.55 1.54 1.52 1.72 1.63 1.56 1.48 1.42
13.5% 1.71 1.72 1.72 1.72 1.72 1.90 1.81 1.72 1.64 1.57
14.5% 1.85 1.87 1.88 1.90 1.93 2.08 1.98 1.88 1.80 1.72
15.5% 1.99 2.01 2.05 2.08 2.13 2.26 2.15 2.05 1.95 1.87
Source: Team estimates
Weighting of the models
We treat both RIM and Justified P/BV equally in our valuation as we consider them equally
relevant. The price we obtained is RON 1.70 per share.
1 Aswath Damodaran is a Professor of Finance at the Stern School of Business at New York University, best known as the author of several widely used academic and
practitioner textson Valuation
Figure 15: Components of Cost
of Equity
2015-18e
Risk-free rate 3.67 – 4.74%
ERP 9.13%
Adjusted β 1.11
Cost of equity 13.77 – 14.84%
Source: Team estimates
Figure 16: Components of
Perpetuity Cost of Equity
Perpetuity
YTM 30yrs DE bond 2.53%
LT inflation diff. 0.73%
Risk-free rate 3.26%
ERP 9.13%
Adjusted β 1.11
Cost of equity 13.36%
Source: Team estimates
CFA Institute Research Challenge 20.02.14
7
02000000400000060000008000000
10000000 Traded volume
RON 0.0
RON 0.2
RON 0.4
RON 0.6
RON 0.8
RON 1.0
RON 1.2
RON 1.4
RON 1.6
RON 1.8
RON 2.0
Robert Rekkers
resigns as CEO
2013 gross profits
increase by 30% over
2012
Rumors of taking
over Bank of
CyprusBT borrows $45
mln from EBRD
and IFC to finance SMEs
16 new shares issued
for every 100 held by
stockholdersBuyback of
1,166,000
shares
Issue of
295,735,713 new
shares
Omer Tetik officialy
named as new CEO
Figure 17: BT share price and news flow since 2011
Financial Analysis
Profits are steadily increasing
The preliminary results for 2013 show a profit before tax of RON 443.1m (+30% yoy) and a net
profit of RON 374.9m (+17% yoy). The last quarter of 2013 had a significant contribution to the
bank’s net profit, with RON 134.7m, more than double the result for 3Q13. The management of the
bank declared that their main objective for 2014 is to increase revenues and the efficiency of
operations, so even higher profits are expected. From our estimations, the net profit for 2014 will
be RON 441.7m (+17.8% yoy).
BT is among the few banks in Romania that can accelerate new loans generation BT reported for 2013 a 9.0% increase in gross loans to customers, much higher than the average for
the banking system, but lower than the 11.9% increase realized in 2012. Q413 was the best quarter
in terms of loans given in the last years, with a value of RON 743.6m, representing almost 50% of
the increase in total gross loans for 2013. Growth was registered in all business lines, in retail
lending relying mostly on clients refinancing their loans from other banks, while in the SME
segment growth came from new business.
In August 2013, BT appointed a new CEO, focused on growth rather than restructuring. While
many large banks with foreign shareholders are expected to continue deleveraging (due to
European Union Bank regulations), BT with its status of independent bank can step in and increase
its market share to the target level of 10-11% for 2015-2016. Based on our estimates, we expect the
increase in loans to continue, although at a less spectacular pace of around 6-8% per year.
Growing customer base
The number of active clients of the bank increased during 2013 from 1.67m to 1.76m, while the
number of account operations increased with over 8%. BT reported a portfolio of 2.1m debit and
credit cards (a 10% increase over the end of 2012, but below the target of 2.17m), generating a 13%
higher transaction volume. The bank’s market share regarding transaction volume reached 17%,
with the target of obtaining no. 1 ranking in terms of credit cards.
Figure 18: Main items of gross
operating revenues
Net Interest income (RON m)
Net fee and commision income (RON m)
Gross operating income (RON m)
Source: Company data
Figure 19: Gross operating income
and credit risk provision
Gross operating income (RON m)
Net impairment losses on assets (RON m)
Net profit (RON m)
Source: Company data
0.0
50.0
100.0
150.0
200.0
250.0
300.0
350.0
400.0
450.0
1Q12 2Q12 3Q12 4Q12 1Q13 2Q13 3Q13 4Q13
-200.0
-150.0
-100.0
-50.0
0.0
50.0
100.0
150.0
200.0
250.0
300.0
350.0
1Q12 2Q12 3Q12 4Q12 1Q13 2Q13 3Q13 4Q13
CFA Institute Research Challenge 20.02.14
8
Customer deposits are a reliable financing resource for BT
BT controlled at the end of 2013 total assets of RON 23.0m, an 8.4% yoy increase, versus previous
14.5% yoy increase in 2012. Asset growth was mostly achieved on the back of local funding.
Deposits from customers reached the value of RON 25.8m, an increase of 11.1% yoy (14.6% in
2012). The ratio of gross loans to deposits is 74.25%, similar to the 2012 level (76% in 2011),
while the sector average exceeds 100% (120.12% in 2012 and 116.7% in 2011). The bank does not
have to struggle for deposits gathering, enjoying reasonable financing costs. The bank’s clients
have a stable behavior, with no significant withdrawals happening so far.
Higher net interest income in spite of decreasing interest rates
Net interest income increased 27.3% yoy in 2013, due to a simultaneous 4.0% increase in interest
income and a 16.3% decrease in interest expense. This decrease was caused mainly by a significant
reduction of interest rates paid for deposits from customers. For loans and advances to customers,
the interest rate suffered only a small decrease. We consider this situation to be temporary and we
expect the gap between the interest rates for loans and deposits to narrow in the following years.
Net interest income will continue to increase, but the growth rate will be around 5-6%, much lower
than in 2013.
On a quarterly basis, net interest income increased steadily since 4Q12 (with less than 10% qoq)
and jumped 30% qoq in 4Q13. The increase of net interest income in the last quarter is explained
by a 6% qoq increase in interest earning assets, which have been maintaining an almost constant
level during the rest of the year. Net interest margin has been slowly decreasing during 2012 and
this trend was expected to continue in 2013. However, starting in 4Q12, net interest margin started
increasing and spiked to 5.0% (annualized) in 4Q13. The bank continues to lend predominantly in
RON, and this should help to improve net interest margin, as RON yields are higher than for FX
placements. We expect net interest margin to suffer a small correction during the first semester of
2014 and then to stabilize for 2014 and 2015. Expectations regarding net interest margin are based
on more stable funding costs, lower reserves requirements and the consolidation of the banking
system.
Nonperforming loans ratio increases, but remains below sector’s average
At the end of 2013, nonperforming loans represented 12.57% of gross loans, an increase from the
previous values of 11.31% (2012) and 8.62% (2011), but significantly below the sector’s average
ratio. The coverage ratio reached a new high, with a level of 122.4%, versus the previous ratio of
108.0% for 2012. Since most nonperforming loans are coming from the past and the average
maturity of corporate loans (the most affected ones) is 2 years, it is unlikely that the bank will need
significant additional provisions booking. However, many loans have been restructured in order to
avoid provisioning, and some of them may still be losses. In addition, the increase in NPL ratio
supports the theory that BT will eventually catch up with the sector level of provisioning, with a
significant impact on profitability.
Net impairment losses on assets increased in 2013 to RON 407m (+9% yoy), mostly during the last
2 quarters, but without exceeding the target. Total allowance for loan losses reached RON 2,493m,
an 18% yoy increase from the 2012 level of RON 2,111m. The solvency ratio increased to a
comfortable level of 13.78% (including net profit for 2013) from the previous value of 12.16%
(including net profit for 2012). Although above the National Bank of Romania’s requirement, the
solvency ratio is below the banking system average and we expect it to remain so, given the
increase in new loans. The bank will probably continue its no dividend policy, transferring the net
profit to share capital.
Net fee and commission income expected to increase due to higher business volumes
Net fee and commission income decreased to RON 361.7m in 2013 (-14.8% yoy), due to a 10.8%
yoy decrease in fee and commission income coupled with a 16.5% yoy increase in fee and
commission expense. On a quarterly basis, net fee income suffered a downward correction in 1Q13
and then slowly increased for the rest of the year. The net fee income margin maintained an almost
constant value of around 1.5% during 2012, decreasing sharply in 1Q13. Net fee income margin
started increasing in 2Q13 and we expect it to continue this trend, as higher business volumes
should push up net fee income. The management of the bank declared that fees and commissions
are rather below market, so this could be a source of additional income in the future. The bank
grants start-ups a grace period of one year not to pay fees and commissions for some of the bank’s
products. This diminishes income in the short term, but increases customer base and net fee income
after the grace period expires.
Cost to income ratio falls below 50%
BT managed to reduce its cost/income ratio in 2013 to 48.7%, from previous values of 53.13%
(2012) and 51.65% (2011). Personnel expenses increased 7.7% yoy in 2013 (+11% yoy in 2012)
due to higher remuneration for employees in line with the better performance of the bank. The
migration to a new IT core banking system plus other measures to be implemented by the new CEO
are expected to reduce the yoy increase of personnel and other expenses. We consider that the
target of 45% for the cost/income ratio can be reached, but rather by increasing revenues than by
cutting cost further.
Figure 20: IEA, NII and NFI
Interest earning assets (RON m)
Net interest income (%, qoq)
Net fee and commission income (%, qoq)
Source: Company data
Figure 21: NIM and NFI annualized
evolution
NII (annualized*)/Avg. IEA (%)
NFI (annualized*)/Avg. Total Assets (%)
*NII and NFI annualized based on quarterly figures
Figure 22: Balance sheet growth
Loans growth
Deposits growth
2010-2018E average loan growth 2010-2018E average deposit growth
-40.0%
-30.0%
-20.0%
-10.0%
0.0%
10.0%
20.0%
30.0%
40.0%
23,000
24,000
25,000
26,000
27,000
28,000
29,000
30,000
31,000
32,000
1Q122Q123Q124Q121Q132Q133Q134Q13
3.65%3.48%
3.29% 3.20%3.43%
3.62%3.96%
5.01%
1.49% 1.53% 1.50% 1.51%
1.07% 1.16% 1.22% 1.32%
0.00%
1.00%
2.00%
3.00%
4.00%
5.00%
6.00%
1Q12 2Q12 3Q12 4Q12 1Q13 2Q13 3Q13 4Q13
0.0%
2.0%
4.0%
6.0%
8.0%
10.0%
12.0%
14.0%
16.0%
18.0%
201
0
201
1
201
2
201
3
201
4E
201
5E
201
6E
201
7E
201
8E
CFA Institute Research Challenge 20.02.14
9
Corporate Governance and Social responsibility
Corporate governance. In order to measure the general condition of BT’s corporate governance,
we used the Principles of Corporate Governance as developed by the Organization for Economic
Cooperation and Development (OECD). We illustrate the factors that are taken into account and
their respective weigh (See Appendix N). Each criterion was graded from 1 to 10, leading to a final
score of 9 for BT (See Appendix 38 for details). This is a high score, but it does allow for some
improvement. The issues that keep the score from being a perfect 10 could be: The European Bank for Reconstruction and Development (EBRD) owns almost a 15% share
of the stocks, which is an exception to an internal rule stating that no shareholder can own
more than 10%;
The EBRD also has a veto power, being able to turn down any proposal, even if all other
shareholders have agreed on it;
The Board of Directors is elected for 4 years. Recommendations are that elections take place
yearly, so that members of the Board take decisions with caution;
The Board does not include any independent members. While the law does not forbid this, it
is recommended in practice in order to ensure independence and competence.
Environmental protection. Although the area of activity isn’t known for notable damages to the
environment, BT partnered with the European Bank for Reconstruction and Development with the
purpose of ensuring the efficiency and the reduction of power consumption. BT has also
implemented a system by which to identify and track the social and environmental risk of the
project financed by the bank. Therefore it is important that potential clients of the bank demonstrate
that they respect the legislation regarding the social and environment aspects.
Investment Risks Market risk: currency risk
BT is exposed to currency risk by transactions in foreign currency against RON. In the last 2 years
we have witnessed numerous shocks of different sizes on the exchange rates of main foreign
currencies against RON due to Romania’s political instability. The best example would be the
change of Government in the summer of 2012. While apparently the political situation has become
more stable, it is a risk we cannot rule out.
Market risk: Trading losses
Although BT’s trading has not lead to losses due to a careful process of monitoring the portfolio,
we must take into account the possibility of systemic risk that could hinder trading gains on a wide
scale, inevitably leaving a mark on BT’s results from this area.
Market risk: Romania enters the EURO zone
Even though Romania does not fulfill all required criteria, it has announced not long ago that it
aims to enter the Eurozone in 2018-2019. Joining the Eurozone would decrease exchange rate risk
significantly with other currencies too since their exchange rate with the EURO is much less
volatile than against RON.
Operational risks: Increase in energy and labor costs.
An increase in the costs of labor and energy can affect the future margins of BT. Labor costs have
risen in Romania in 2013 by an average of 7% for government employees, with the private sector
lagging behind at 2%. We believe this gap will be recovered partly in the coming year. An
advantage for BT is that its employees are not part of any union. Energy costs are also expected to
rise in 2014, as well as other utilities prices.
Public Image risk: Company identity
The BT name and logo are present within all subsidiaries of the group. It can work well to promote
each of the group’s entities but it can also present a public image risk if one of the companies
performs in a poor or unlawful manner. Public opinion will most likely associate such actions with
the entire group, regardless of the entity’s autonomy.
Non-Performing Loans Ratio
Romania currently has the highest NPL ratio in the region with 21.6%. While BT has done well to
avoid the NPLs of the real estate sector in the last few years, it can still be affected by shocks
originating from other companies that can no longer pay their suppliers, which in turn can be BT
clients, resulting in NPLs on BT’s balance sheet. The high NPL ratio for Romania makes us believe
this is a risk worth considering.
Competition risk: BT’s competitors on the Romanian Market
BT’s competitors on the Romanian market are mainly banks with foreign capital. This poses a
series of risks since these companies can access a larger amount of capital and can secure foreign
currency at cheaper rates. This is noteworthy in the current situation where the majority of loans are
in euros. However, being a Romanian based company, BT can access cheaper RON sources and,
CFA Institute Research Challenge 20.02.14
10
most importantly, can take decisions faster, since they are not depending on a parent company for
approval.
Valuation risks
Two main assumptions which were considered for valuation were: Long-term Growth rate and
Return on Equity ratio. Long term growth rate is main assumption for Residual Income Model
where it is stated as 3%. In addition to sensitivity analysis we perform Monte Carlo simulation to
check how changes in long-term growth rate will influence our target price. Variation interval of
long term growth rate is within [1% – 5%], with Standard deviation 1.37% and Median 1.5% based
on Romanian Real GDP growth rates historical data. We assume that long-term growth rate follows
normal distribution. Results have 90% significance. 10,000 Economic scenarios were simulated and
considered. Results of stock price and relating probabilities were plotted on the graph. The mean is
1.67 which supports our hold recommendation for Residual Income model (See Appendix 40). We
perform Monte Carlo analysis for Justified P/BV model checking the effect of perpetuity rate
change on our recommendation. We assume that perpetuity rate will change in [12.36% -14.36 %]
with 90% significance having normal distribution with 0.5 % standard deviation. The results for
stock prices are plotted on graph. The mean is 1.72 which supports our hold recommendation for
Justified P/BV model.
Team disclosure:
We assign a BUY rating when a security is expected to deliver returns of 15% or greater over the next
twelve months. A SELL rating is given when the security is expected to deliver negative returns over
the next twelve months, while a HOLD rating implies flat returns over the next twelve months.
Figure 23: Monte Carlo
Simulation for Justified P/BV.
Sell area -13.56%
Hold area - 60.24%
Buy area - 26.2%
Source: Team estimates
1.4
31
.48
1.5
31
.58
1.6
31
.68
1.7
31
.78
1.8
31
.88
1.9
31
.98
2.0
3
BT stock price
CFA Institute Research Challenge 20.02.14
11
Appendix 1: Statement of financial position
FY 09 A FY 10 A FY 11 A FY 12 A FY 13 A FY 14 F FY 15 F FY 16 F FY 17 F FY 18 F
Assets
1. Cash and cash equivalents 3,183.3 3,696.8 4,546.5 5,576.3 4,102.3 4,138.6 4,469.7 4,144.9 4,074.8 4,319.2
2. Placements with banks 1,520.7 1,221.5 769.4 1,383.1 1,758.5 1,924.0 1,929.0 1,911.4 2,038.6 2,188.0
3. Investment securities 2,645.2 3,865.7 5,933.6 6,568.9 8,947.6 10,289.7 11,524.5 12,792.2 14,071.4 15,197.1
4. Loans and advances to
customers 11,542.3 12,264.8 14,035.3 15,457.5 16,667.2 18,106.4 19,666.7 21,282.5 22,920.5 24,295.8
5. Property and equipment 276.6 260.5 266.6 290.0 289.0 294.8 299.8 304.3 310.4 316.6
6. Intangible assets 10.2 47.4 69.1 80.1 82.9 85.4 88.0 91.0 94.2 97.5
7. Equity investments 95.8 105.5 70.0 74.1 74.0 74.0 74.0 74.0 74.0 74.0
8. Other assets 94.1 82.0 127.3 142.1 144.6 160.3 175.4 172.0 175.3 175.0
Total assets 19,368.3 21,544.2 25,817.8 29,572.0 32,066.0 35,073.2 38,227.0 40,772.3 43,759.2 46,663.2
Liabilities
1. Deposits from banks 259.1 333.2 251.2 46.0 419.0 350.7 382.3 407.7 437.6 466.6
2. Deposits from customers 15,059.2 17,324.4 20,280.2 23,232.9 25,803.9 27,590.8 29,798.0 31,883.9 33,956.4 35,993.7
3. Loans from banks and other
financial institutions 1,865.1 1,401.4 2,469.0 2,969.3 2,067.3 2,981.2 3,249.3 3,057.9 3,063.1 3,033.1
4. Other subordinated
liabilities 254.9 257.6 260.1 288.8 337.9 350.7 382.3 407.7 437.6 466.6
5. Other liabilities 99.9 155.7 237.5 340.1 355.5 275.5 370.0 320.8 393.9 336.0
Total liabilities 17,538.4 19,472.2 23,498.0 26,877.1 28,983.5 31,548.9 34,181.9 36,078.0 38,288.5 40,296.1
Equity
1. Share capital 1,176.2 1,560.5 1,860.2 1,989.5 2,292.9 2,645.7 3,061.1 3,551.0 4,161.4 4,891.6
2. Own shares 0.0 0.0 (1.9) (7.8) (0.8) (0.8) (0.8) (0.8) (0.8) (0.8)
3. Share premium 97.7 0.0 0.7 0.0 0.0 0.0 0.0 0.0 0.0 0.0
4. Retained earnings 369.8 300.4 235.0 376.1 430.1 496.9 576.0 704.3 831.6 951.6
5. Revaluation reserve 21.2 26.9 34.1 38.1 29.0 29.0 29.0 29.0 29.0 29.0
6. Other reserves 165.0 184.3 191.7 298.9 331.3 353.5 379.8 410.8 449.4 495.6
Total equity 1,829.9 2,072.0 2,319.8 2,694.9 3,082.6 3,524.3 4,045.1 4,694.3 5,470.7 6,367.1
Total liabilities and equity 19,368.3 21,544.2 25,817.8 29,572.0 32,066.0 35,073.2 38,227.0 40,772.3 43,759.2 46,663.2
Source: Company data, Team estimates
CFA Institute Research Challenge 20.02.14
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Appendix 2: Income Statement (RON million)
FY 09 A FY 10 A FY 11 A FY 12 A FY 13 A FY 14 F FY 15 F FY 16 F FY 17 F FY 18 F
Interest income 2,060.9 1,862.7 1,804.2 2,012.4 2,093.7 2,130.7 2,177.4 2,278.1 2,367.1 2,440.4
Interest expense (1,341.5) (890.9) (932.4) (1,074.5) (899.7) (874.9) (852.7) (832.9) (808.3) (774.0) Net interest income 719.3 971.8 871.9 937.9 1,194.0 1,255.8 1,324.7 1,445.2 1,558.8 1,666.4
Fee and commission income 396.6 401.2 441.0 487.7 435.1 487.3 545.8 605.9 666.4 726.4
Fee and commission expense (43.6) (44.2) (51.7) (63.0) (73.4) (80.0) (87.2) (94.2) (100.8) (106.8) Net fee and commission income 353.1 357.0 389.3 424.7 361.7 407.3 458.6 511.7 565.7 619.6
Net trading income 138.9 119.0 117.1 131.2 128.8 137.9 148.9 161.5 175.3 191.0
Other operating income 29.8 18.5 24.4 42.8 39.2 41.1 43.2 45.3 47.6 50.0
Operating income 1,241.1 1,466.2 1,402.7 1,536.5 1,723.7 1,842.1 1,975.3 2,163.7 2,347.3 2,527.0
Net impairment losses on assets (415.8) (652.1) (380.8) (379.4) (407.4) (417.2) (427.0) (436.8) (446.6) (456.4)
Personnel expenses (326.1) (350.9) (368.9) (409.6) (441.3) (463.4) (481.9) (498.8) (513.7) (529.2)
Depreciation and amortization (61.2) (54.2) (49.3) (46.4) (56.8) (45.6) (42.7) (39.5) (36.4) (37.3)
Other operating expenses (266.6) (280.0) (325.4) (360.3) (375.1) (390.1) (403.8) (415.9) (426.3) (436.9)
Operating expenses (1,069.6) (1,337.2) (1,124.4) (1,195.8) (1,280.6) (1,316.3) (1,355.3) (1,391.0) (1,423.0) (1,459.8)
Profit before income tax 171.5 129.0 278.2 340.8 443.1 525.9 620.0 772.8 924.3 1,067.2
Income tax expense (23.3) (20.2) (49.7) (20.3) (68.2) (84.1) (99.2) (123.6) (147.9) (170.8)
Taxation rate 13.6% 15.7% 17.9% 6.0% 15.4% 16.0% 16.0% 16.0% 16.0% 16.0%
Profit for the year 148.2 108.7 228.5 320.4 374.9 441.7 520.8 649.1 776.4 896.4
Source: Company data, Team estimates
CFA Institute Research Challenge 20.02.14
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Appendix 3: Operating model
FY 09 A FY 10 A FY 11 A FY 12 A FY 13 A FY 14 F FY 15 F FY 16 F FY 17 F FY 18 F
Investment Securities
Investment Securities 2,645.2 3,865.7 5,933.6 6,568.9 8,947.6 10,289.7 11,524.5 12,792.2 14,071.4 15,197.1
% growth
46.1% 53.5% 10.7% 36.2% 15.0% 12.0% 11.0% 10.0% 8.0%
Placements with banks
Placements with banks 1,520.7 1,221.5 769.4 1,383.1 1,758.5 1,924.0 1,929.0 1,911.4 2,038.6 2,188.0
% of total assets
6.3% 3.6% 5.4% 5.9% 6.0% 5.5% 5.0% 5.0% 5.0%
Loans
Loans and advances to
customers, gross 12,234.0 13,542.7 15,694.6 17,568.5 19,160.3 20,693.1 22,348.5 23,912.9 25,467.3 26,995.3
% growth
10.7% 15.9% 11.9% 9.1% 8.0% 8.0% 7.0% 6.5% 6.0%
Fixed assets
Property and equipment 276.6 260.5 266.6 290.0 289.0 294.8 299.8 304.3 310.4 316.6
% growth
-5.8% 2.3% 8.8% (0.3%) 2.0% 1.7% 1.5% 2.0% 2.0%
Intangible assets 10.2 47.4 69.1 80.1 82.9 85.4 88.0 91.0 94.2 97.5
% growth
364.4% 46.0% 15.8% 3.5% 3.0% 3.0% 3.5% 3.5% 3.5%
Other assets 94.1 82.0 127.3 142.1 144.6 160.33 175.37 172.02 175.32 175.04
% of total assets
0.4% 0.6% 0.6% 0.5% 0.5% 0.5% 0.5% 0.4% 0.4%
Deposits Loans and advances to
customers, net 11,542.3 12,264.8 14,035.3 15,457.5 16,667.2 18,106.4 19,666.7 21,282.5 22,920.5 24,295.8
Allowance for loan losses (692) (1,278) (1,659) (2,111) (2,493) (2,587) (2,682) (2,630) (2,547) (2,700) % of loans and advances to
customers 6.0% 10.4% 11.8% 13.7% 15.0% 12.5% 12.0% 11.0% 10.0% 10.0%
Loans and advances to customers, gross 12,234.0 13,542.7 15,694.6 17,568.5 19,160.3 20,693.1 22,348.5 23,912.9 25,467.3 26,995.3
Deposits from customers 15,059.2 17,324.4 20,280.2 23,232.9 25,803.9 27,590.8 29,798.0 31,883.9 33,956.4 35,993.7
Ratio of loans / deposits 81.2% 78.2% 77.4% 75.6% 74.3% 75% 75% 75% 75% 75%
Deposits from banks 259.1 333.2 251.2 46.0 419.0 350.7 382.3 407.7 437.6 466.6
% of total assets 1.3% 1.5% 1.0% 0.2% 1.3% 1.0% 1.0% 1.0% 1.0% 1.0% Loans from banks and other
financial institutions 1,865.1 1,401.4 2,469.0 2,969.3 2,067.3 2,981.2 3,249.3 3,057.9 3,063.1 3,033.1
% of total assets 9.6% 6.5% 9.6% 10.0% 6.4% 8.5% 8.5% 7.5% 7.0% 6.5%
Other subordinated liabilities 254.9 257.6 260.1 288.8 337.9 350.7 382.3 407.7 437.6 466.6
% of total assets 1.3% 1.2% 1.0% 1.0% 1.1% 1.0% 1.0% 1.0% 1.0% 1.0%
Cash, deposits from customers
Cash and cash equivalents 3,183.3 3,696.8 4,546.5 5,576.3 4,102.3 4,138.6 4,469.7 4,144.9 4,074.8 4,319.2
% of deposits from customers 21.1% 21.3% 22.4% 24.0% 15.9% 15.0% 15.0% 13.0% 12.0% 12.0%
Net interest income
Interest income
Loans and advances to customers 1,638.0 1,537.2 1,436.3 1,425.7 1,498.5 1,502.8 1,514.3 1,553.6 1,604.4 1,652.1
% of loans and advances to
customers 14.2% 12.5% 10.2% 9.2% 9.0% 8.3% 7.7% 7.3% 7.0% 6.8% Current accounts held with
banks 98.7 44.4 39.4 36.8 33.1 27.3 29.1 24.9 24.4 21.6
% of cash and cash equivalents 3.1% 1.2% 0.9% 0.7% 0.8% 0.7% 0.7% 0.6% 0.6% 0.5%
Available for sale securities 274.9 254.4 294.0 520.1 534.5 565.9 599.3 665.2 703.6 729.5
% of investment securities 10.4% 6.6% 5.0% 7.9% 6.0% 5.5% 5.2% 5.2% 5.0% 4.8%
Placements with banks 49.3 26.7 34.6 29.8 27.6 34.6 34.7 34.4 34.7 37.2
% of placements with banks 3.2% 2.2% 4.5% 2.2% 1.6% 1.8% 1.8% 1.8% 1.7% 1.7%
Total interest income 2,060.9 1,862.7 1,804.2 2,012.4 2,093.7 2,130.7 2,177.4 2,278.1 2,367.1 2,440.4
CFA Institute Research Challenge 20.02.14
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Interest expense
Deposits from customers 1,119.1 816.4 834.7 916.7 812.5 786.3 774.7 765.2 747.0 719.9
% of deposits from customer 7.4% 4.7% 4.1% 3.9% 3.1% 2.9% 2.6% 2.4% 2.2% 2.0%
Loans from banks and other financial institutions 216.1 70.7 70.0 113.3 82.8 83.3 72.6 62.4 56.0 49.0
% of loans from banks and
other financial institutions 10.2% 4.3% 2.6% 3.5% 3.4% 2.5% 2.0% 1.8% 1.6% 1.4%
Available for sale securities 0.0 0.0 22.4 33.6 0.0 0.0 0.0 0.0 0.0 0.0
% of investment securities 0.0% 0.0% 0.4% 0.5% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%
Deposits from banks 6.3 3.8 5.3 11.0 4.4 5.3 5.4 5.3 5.3 5.1
% of deposits from banks 2.4% 1.1% 2.1% 23.9% 1.1% 1.5% 1.4% 1.3% 1.2% 1.1%
Total interest expense 1,341.5 890.9 932.4 1,074.5 899.739 874.9 852.7 832.9 808.3 774.0
Net fee and commission income
Fee and commission income 396.6 401.2 441.0 487.7 435.1 487.3 545.8 605.9 666.4 726.4
% growth
1.1% 9.9% 10.6% (10.8%) 12.0% 12.0% 11.0% 10.0% 9.0%
Fee and commission expense 43.6 44.2 51.7 63.0 73.4 80.0 87.2 94.2 100.8 106.8
% growth
1.5% 16.9% 21.9% 16.5% 9.0% 9.0% 8.0% 7.0% 6.0%
Net trading income 138.9 119.0 117.1 131.2 128.8 137.9 148.9 161.5 175.3 191.0
% growth
(14.3%) (1.6%) 12.0% (1.8%) 7.0% 8.0% 8.5% 8.5% 9.0%
Other operating income 29.8 18.5 24.4 42.8 39.2 41.1 43.2 45.3 47.6 50.0
% growth
(38.1%) 32.1% 75.3% (8.5%) 5.0% 5.0% 5.0% 5.0% 5.0%
Operating expenses
Net impairment losses on assets 415.8 652.1 380.8 379.4 407.4 417.2 427.0 436.8 446.6 456.4
% of loans and advances to customers 3.6% 5.3% 2.7% 2.5% 2.4% 2.4% 2.4% 2.3% 2.3% 2.2%
Personnel expenses 326.1 350.9 368.9 409.6 441.3 463.4 481.9 498.8 513.7 529.2
% growth
7.6% 5.1% 11.0% 7.7% 5.0% 4.0% 3.5% 3.0% 3.0%
Depreciation and amortization 61.2 54.2 49.3 46.4 56.8 45.6 42.7 39.5 36.4 37.3
% of fixed assets 21.3% 17.6% 14.7% 12.5% 15.3% 12.0% 11.0% 10.0% 9.0% 9.0%
Other operating expenses 266.6 280.0 325.4 360.3 375.1 390.1 403.8 415.9 426.3 436.9
% growth
5.0% 16.2% 10.7% 4.1% 4.0% 3.5% 3.0% 2.5% 2.5%
Source: Team estimates
CFA Institute Research Challenge 20.02.14
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Appendix 4: Residual income model
FY 09 A FY 10 A FY 11 A FY 12 A FY 13 A FY 14 F FY 15 F FY 16 F FY 17 F FY 18 F
Profit for the year 148.2 108.7 228.5 320.4 374.9 441.7 520.8 649.1 776.4 896.4
Total equity 1,829.9 2,072.0 2,319.8 2,694.9 3,082.6 3,524.3 4,045.1 4,694.3 5,470.7 6,367.1
Residual Income
(160.0) (73.9) (24.9) (23.0) (13.3) (0.5) 39.8 49.9 17.8
ROE
5.57% 10.41% 12.78% 12.98% 13.37% 13.76% 14.86% 15.28% 15.15%
Valuation 31-12-2014 (RON million)
FY 09 A FY 10 A FY 11 A FY 12 A FY 13 A FY 14 F FY 15 F FY 16 F FY 17 F FY 18 F
Residual income
(0.5) 39.8 49.9 17.8
Continuing value
177.4
Discount factor
0.879 0.771 0.675 0.588
Present value of RI and CV
(0.4) 30.7 33.7 114.7
Sum of PV of Residual Income
178.7
Total equity
3,524.3
Value of equity
3,703.0
Number of shares (millions) 2,206.44
TLV value / share 1.68
Source: Team estimates
Appendix 5: Justified P/BV model
FY 18 F
Total equity 6,367.1
Justified PB 3,790.9
Number of shares (millions) 2,206.4
TLV value / share 1.72
FY 15 F FY 16 F FY 17 F FY 18 F Perpetuity
Cost of equity 13.77% 13.94% 14.29% 14.84% 13.36%
Discount rate 0.879 0.771 0.675 0.588
CV assumptions
ROE 13.5%
Long-term growth rate 3.0%
Source: team estimates
CFA Institute Research Challenge 20.02.14
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Appendix 6: Cost of equity
FY 15 F FY 16 F FY 17 F FY 18 F Perpetuity
YTM Romanian government bond 3.67% 3.84% 4.19% 4.74%
YTM 30yrs German government bonds
2.53%
Long-term inflation differential
0.73%
Risk-free rate
3.26%
Equity risk premium 9.13% 9.13% 9.13% 9.13% 9.13%
Adjusted β 1.11 1.11 1.11 1.11 1.11
Cost of equity 13.77% 13.94% 14.29% 14.84% 13.36%
Total ERP 9.13%
Country risk premium 3.38%
Equity risk premium 5.75%
Raw β 1.16
Bloomberg adjusted β 1.11
Differential inflation
Long-term target
CPI Romania 2.50%
CPI Germany 1.77%
Source: team estimates
CFA Institute Research Challenge 20.02.14
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Appendix 7: BT loans and Advances to customers
In RON thousands 31-Dec-12 31-Dec-11 2011-2012 % increase
Individuals 6,325,313 5,819,493 8.69%
Trading 2,882,807 2,712,410 6.28%
Manufacturing 2,507,113 2,196,027 14.17%
Construction 990,287 838,050 18.17%
Services 941,908 829,219 13.59%
Transport 702,256 632,995 10.94%
Real Estate 526,755 474,057 11.12%
Agriculture 729,524 560,453 30.17%
Free Lancers 382,202 340,535 12.24%
Chemical Industry 315,305 322,707 -2.29%
Energy Industry 322,277 249,034 29.41%
Financial Institutions 312,254 197,103 58.42%
Telecommunication 125,484 108,477 15.68%
Mining Industry 170,697 142,517 19.77%
Fishing Industry 7,255 4,607 57.48%
Government Bodies 31,030 27,560 12.59%
Others 296,018 239,398 23.65%
Total loans and Advances to customers before
impairment allowance 17,568,485 15,694,642 11.94%
Less allowances for impairment losses on loans (2,111,004) (1,659,352) 27.22%
Allowances for impairment losses on loans as a
% of Total loans and Advances to customers
before impairment allowance
12.02% 10.57%
Total loans and advance to customers, net of
impairment allowance 15,457,481 14,035,290 10.13%
Source: NBR
Appendix 8: Advantages of Flexube core-banking system
For the customer For the bank
Client enrollment is just a matter of signing
the form
Process automation and optimization
Customer electronic files (ID scan included) Account attachments are automatically posted
Customer info update for all
agencies/branches
Centralization of IT infrastructure
24/7 available e-channels: a key ingredient for
self-banking
Account statements available in all branches
and Internet Banking
Reconciliation and automatic transfer of bill
payments
End of day/month processes considerably
faster
Source: Company data
CFA Institute Research Challenge 20.02.14
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Appendix 9 Real GDP growth rate of EU countries
Source: Eurostat
Appendix 10: GDP per capita of Romania.
Source: Eurostat
-8
-6
-4
-2
0
2
4
6
Latv
ia
Esto
nia
Lith
uan
ia
Po
lan
d
Slo
vaki
a
Mal
ta
Au
stri
a
Swed
en
Bu
lgar
ia
Ge
rman
y
Ro
man
ia
Un
ited
Kin
gdo
m
Irel
and
Fran
ce
Bel
giu
m
Luxe
mb
ou
rg
Den
mar
k
Cze
ch R
epu
blic
Fin
lan
d
Ne
the
rlan
ds
Spai
n
Hu
nga
ry
Cro
atia
Cyp
rus
Ital
y
Slo
ven
ia
Po
rtu
gal
Gre
ece
0
1,000
2,000
3,000
4,000
5,000
6,000
7,000
2004 2005 2006 2007 2008 2009 2010 2011 2012
CFA Institute Research Challenge 20.02.14
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Appendix 11: GDP per capita of EU countries
Source: Eurostat
Country 2004 2005 2006 2007 2008 2009 2010 2011 2012
Serbia 2,500 2,700 3,100 3,900 4,400 4,000 3,800 4,400 4,100
Bulgaria 2,600 3,000 3,400 4,000 4,600 4,600 4,800 5,200 5,400
Romania 2,800 3,700 4,500 5,800 6,500 5,500 5,800 6,200 6,200
Hungary 8,100 8,800 8,900 9,900 10,500 9,100 9,600 9,900 9,800
Poland 5,300 6,400 7,100 8,200 9,500 8,100 9,200 9,600 9,900
Croatia 7,400 8,100 8,900 9,800 10,700 10,100 10,100 10,400 10,300
Latvia 4,900 5,800 7,200 9,600 10,500 8,600 8,600 9,800 10,900
Lithuania 5,400 6,300 7,400 8,900 10,100 8,400 8,900 10,200 11,000
Estonia 7,200 8,300 10,000 12,000 12,100 10,400 10,700 12,100 13,000
Slovakia 6,300 7,100 8,300 10,200 11,900 11,600 12,100 12,800 13,200
Czech Republic 9,000 10,200 11,500 12,800 14,800 13,600 14,300 14,800 14,600
Portugal 14,200 14,600 15,200 16,000 16,200 15,900 16,300 16,100 15,600
Malta 11,600 12,200 12,800 13,700 14,600 14,400 15,400 16,000 16,300
Greece 16,700 17,400 18,700 19,900 20,800 20,500 19,600 18,500 17,200
Slovenia 13,600 14,400 15,500 17,100 18,400 17,300 17,300 17,600 17,200
Cyprus 17,300 18,400 19,500 20,700 21,800 20,900 21,000 21,100 20,700
Spain 19,700 21,000 22,400 23,500 23,900 22,800 22,700 22,700 22,300
European Union (28 countries) 21,600 22,400 23,600 24,900 25,000 23,400 24,400 25,100 25,500
European Union (27 countries) 21,700 22,500 23,700 25,100 25,100 23,500 24,500 25,200 25,600
Italy 24,000 24,500 25,300 26,200 26,300 25,200 25,700 26,000 25,700
Euro area (18 countries) 24,300 25,000 26,200 27,500 28,000 26,900 27,500 28,200 28,400
Euro area (EA11-2000, EA12-2006, EA13-
2007, EA15-2008, EA16-2010, EA17-2013,
EA18)
24,900 25,600 26,800 28,000 28,400 27,100 27,700 28,400 28,500
Euro area (17 countries) 24,400 25,200 26,300 27,600 28,100 27,000 27,700 28,400 28,500
Euro area (12 countries) 24,900 25,600 26,800 28,000 28,500 27,400 28,100 28,800 28,900
European Union (15 countries) 26,000 26,800 28,100 29,400 29,100 27,400 28,500 29,200 29,700
United Kingdom 29,900 31,000 32,700 34,200 29,900 25,700 27,800 28,200 30,300
France 26,500 27,300 28,400 29,600 30,100 29,300 29,900 30,700 31,100
Germany (until 1990 former territory of the
FRG) 26,600 27,000 28,100 29,500 30,100 29,000 30,500 31,900 32,600
Iceland 36,500 44,300 43,800 48,000 32,200 27,200 29,800 31,600 32,900
Belgium 28,000 29,000 30,200 31,600 32,400 31,600 32,700 33,600 34,000
Finland 29,100 30,000 31,500 34,000 34,900 32,300 33,300 35,000 35,500
Ireland 36,900 39,200 41,600 43,100 40,100 35,800 34,700 35,500 35,700
Netherlands 30,200 31,500 33,100 34,900 36,200 34,700 35,300 35,900 35,800
Austria 28,700 29,800 31,300 33,000 34,000 33,100 34,100 35,700 36,400
Sweden 32,400 33,000 35,000 36,900 36,100 31,500 37,300 40,800 42,800
Denmark 36,500 38,300 40,200 41,700 42,800 40,500 42,600 43,200 43,900
Switzerland 40,400 41,300 42,700 43,200 46,400 47,100 53,300 60,300 61,900
Norway 45,600 52,900 58,100 61,100 65,300 56,500 65,000 71,300 77,500
Luxembourg 59,900 65,000 71,700 78,000 76,400 71,400 77,400 80,300 80,700
CFA Institute Research Challenge 20.02.14
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Appendix 12: Unemployment rate of EU countries
Country 2012 2013
Austria 4.3 :
Luxembourg 5.1 5.9
Netherlands 5.3 6.7
Germany 5.5 5.3
Malta 6.4 6.5
Czech
Republic 7 7
Romania 7 7.2
Denmark 7.5 7
Belgium 7.6 8.4
Finland 7.7 8.2
United
Kingdom 7.9 :
Sweden 8 8
Slovenia 8.9 10.2
Poland 10.1 10.4
Estonia 10.2 :
France 10.2 10.8
Italy 10.7 :
Hungary 10.9 :
Cyprus 11.9 16
Bulgaria 12.3 12.9
Lithuania 13.4 11.8
Slovakia 14 14.2
Ireland 14.7 13.1
Latvia 15 :
Croatia 15.9 17.6
Portugal 15.9 16.5
Greece 24.3 :
Spain 25 26.4
: Missing data
Source: Eurostat
Appendix 13: Labor force demand
Period Vacancies Hiring
thousand; monthly averages
2011Q1 39.2 30.8
2011Q2 42.4 31.2
2011Q3 38.3 30.4
2011Q4 36.7 26.5
2012Q1 36.9 26.4
2012Q2 37.9 26.3
2012Q3 37.8 26.6
2012Q4 38.6 26.8
2013Q1 39.0 26.5
2013Q2 39.6 26.4
2013Q3 41.5 27.0
2013 Oct.-Nov 43.0 26.5
Source: NIS, NBR
CFA Institute Research Challenge 20.02.14
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Appendix 14: USD/RON and EUR/RON exchange rate dynamics.
Source: NBR
Appendix 15(9): Private sector loans in domestic and foreign currencies
Source: NBR
2.5000
2.7500
3.0000
3.2500
3.5000
3.7500
4.0000
4.2500
4.5000
4.7500
USD/RON EUR/RON
0.00
10.00
20.00
30.00
40.00
50.00
60.00
70.00
Dec
/20
01
May
/200
2
Oct
/20
02
Mar
/20
03
Au
g/2
003
Jan
/20
04
Jun
/20
04
No
v/2
004
Ap
r/20
05
Sep
/20
05
Feb
/20
06
Jul/
20
06
Dec
/20
06
May
/200
7
Oct
/20
07
Mar
/20
08
Au
g/2
008
Jan
/20
09
Jun
/20
09
No
v/2
009
Ap
r/20
10
Sep
/20
10
Feb
/20
11
Jul/
20
11
Dec
/20
11
May
/201
2
Oct
/20
12
Mar
/20
13
Au
g/2
013
loans to private sector in domestic currency percent
loans to private sector in foreign currency
CFA Institute Research Challenge 20.02.14
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Appendix 16: Total investment % of GDP of EU countries
Country 2008 2009 2010 2011 2012
Romania 31.92 24.43 24.71 25.97 27.125
Estonia 30.31 21.19 18.97 23.59 25.22
Czech Republic 26.8 24.64 24.55 24.13 23.09
Latvia 29.65 21.58 18.22 21.33 22.79
Austria 21.63 20.7 20.16 21.22 21.44
Bulgaria 33.6 28.87 22.8 21.55 21.4
Norway 21.18 21.64 18.94 19.61 20.75
Belgium 22.31 20.81 20.1 20.72 20.36
Slovakia 24.8 20.74 21.02 23.14 20.11
France 21.31 19.49 19.47 19.98 19.77
Finland 21.36 19.73 18.85 19.41 19.59
Luxembourg 21.44 19.22 17.36 18.54 19.29
Spain 28.69 23.63 22.23 20.71 19.19
Poland 22.26 21.17 19.86 20.2 19.15
Sweden 20.03 17.99 18.03 18.7 18.99
Euro area (17 countries) 21.79 19.66 19.23 19.32 18.66
EU (28 countries) : : : : 18.29
Italy 20.99 19.39 19.42 19.07 17.91
Slovenia 28.63 23.06 19.71 18.59 17.76
Germany 18.58 17.21 17.44 18.13 17.65
Hungary 21.7 20.69 18.56 17.91 17.4
Denmark 21.03 18.07 16.92 17.35 17.39
Netherlands 20.5 18.98 17.36 17.84 17.02
Lithuania 25.35 17.18 16.29 18.03 16.65
Portugal 22.46 20.55 19.57 17.99 16.03
Malta 18.42 16.84 17.62 15.11 14.76
United Kingdom 16.79 14.9 14.89 14.36 14.37
Cyprus 22.94 20.54 19.14 16.64 13.71
Greece 22.56 19.88 17.64 15.15 13.14
Ireland 21.98 16.06 12.17 10.63 10.69
Switzerland 21.27 19.92 20.08 20.56 :
: Missing data
Source: Eurostat, NBR
CFA Institute Research Challenge 20.02.14
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Appendix 17: Investment and Savings Rates, Current account deficit of Romania
Period Investment rate Saving rate Current account
deficit/GDP
Quarters' average (%)
2011Q1 25.5 21.8 3.7
2011Q2 26.1 22.1 4.0
2011Q3 26.8 22.5 4.3
2011Q4 26.9 22.4 4.5
2012Q1 27.0 22.1 4.8
2012Q2 27.1 22.7 4.4
2012Q3 27.4 22.9 4.5
2012Q4 27.0 22.6 4.4
2013Q1 26.4 22.8 3.6
2013Q2 25.0 23.2 1.8
2013Q3 24.5 23.3 1.2
Domestic investment rate is the ratio of gross capital formation to GDP.
Domestic saving rate is the difference between national gross disposable income and final consumption as
a share of GDP.
Source: NBR, NIS
Appendix 18: Money aggregates
Source: NBR
0.0
50,000,000.0
100,000,000.0
150,000,000.0
200,000,000.0
250,000,000.0
300,000,000.0
Jan
. 20
07
May
. 20
07
Sep
. 200
7
Jan
. 20
08
May
. 20
08
Sep
. 200
8
Jan
. 20
09
May
. 20
09
Sep
. 200
9
Jan
. 20
10
May
. 20
10
Sep
. 201
0
Jan
. 20
11
May
. 20
11
Sep
. 201
1
Jan
. 20
12
May
. 20
12
Sep
. 201
2
Jan
. 20
13
May
. 20
13
Sep
. 201
3
M3 (Broad money) (RON thousand)
0.0
10,000,000.0
20,000,000.0
30,000,000.0
40,000,000.0
50,000,000.0
60,000,000.0
70,000,000.0
80,000,000.0
Jan
. 20
07
May
. 20
07
Sep
. 200
7
Jan
. 20
08
May
. 20
08
Sep
. 200
8
Jan
. 20
09
May
. 20
09
Sep
. 200
9
Jan
. 20
10
May
. 20
10
Sep
. 201
0
Jan
. 20
11
May
. 20
11
Sep
. 201
1
Jan
. 20
12
May
. 20
12
Sep
. 201
2
Jan
. 20
13
May
. 20
13
Sep
. 201
3
M1 (Narrow money)
M1 (Narrow money) currency in circulation (RON thousand)
M1 (Narrow money) overnight deposits (RON thousand)
CFA Institute Research Challenge 20.02.14
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Appendix 19: Number of banks and population of EU countries
Country Population Nr of banks Banks/100,000
citizens
Romania 20,121,641 39 0.193821
Greece 10,815,197 40 0.369850
Bulgaria 7,364,570 30 0.407356
Slovakia 5,410,836 28 0.517480
Czech Republic 10,513,209 56 0.532663
United Kingdom 63,181,775 358 0.566619
Spain 46,704,314 290 0.620928
Croatia 4,284,889 35 0.816824
Belgium 11,099,554 103 0.927965
France 66,616,416 623 0.935205
Slovenia 2,055,496 23 1.118951
Italy 59,685,227 694 1.162767
Portugal 10,487,289 151 1.439838
Netherlands 16,819,595 253 1.504198
Sweden 9,633,490 168 1.743916
Poland 38,186,860 691 1.809523
Hungary 9,908,798 189 1.907396
Germany 80,585,700 1842 2.285765
Estonia 1,311,870 31 2.363039
Denmark 5,602,536 161 2.873699
Lithuania 2,955,986 91 3.078499
Latvia 2,005,200 63 3.141831
Finland 5,454,444 303 5.555103
Malta 452,515 27 5.966653
Austria 8,414,638 731 8.687242
Cyprus 1,117,000 101 9.042077
Ireland 4,593,100 458 9.971479
Luxemburg 537,853 147 27.330888
Source: European Banking Federation
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Appendix 20: Number of branches
In EU countries
Country
Branches per
100,000
inhabitants
Austria 53
Bulgaria 52
Czech Republic 20
Estonia 13
France 59
Germany 44
Greece 32
Italy 53
Latvia 20
Lithuania 23
The Netherlands 15
Poland 39
Portugal 59
Slovakia 20
Slovenia 34
Spain 83
Hungary 33
EU-27 average 43
Romania 2011 30
Romania 2012 28
Romania 2013
Q2 27
Source: European Banking Federation
Appendix 21: Number of branches in Romania
Source: NBR
525456586062646668707274
4,8005,0005,2005,4005,6005,8006,0006,2006,4006,6006,800
Dec
/20
07
Ap
r/20
08
Au
g/2
008
Dec
/20
08
Ap
r/20
09
Au
g/2
009
Dec
/20
09
Ap
r/20
10
Au
g/2
010
Dec
/20
10
Ap
r/20
11
Au
g/2
011
Dec
/20
11
Ap
r/20
12
Au
g/2
012
Dec
/20
12
Ap
r/20
13
branches thou. employees
CFA Institute Research Challenge 20.02.14
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Appendix 22: Concentration of Romanian banking system
Period Assets of top five banks as a
share in total assets (%)
Loans of top five banks as
a share in total loans (%)
Deposits of top five banks as
a share in total deposits (%)
2008 54.3 53.3 54.0
2009 52.4 53.4 52.0
2010 52.7 51.5 55.4
2011 54.6 52.3 58.0
2012 54.7 54.4 54.9
Aug/2013 54.0 55.9 53.5
Source: NBR, ECB (Statistical Data Warehouse)
48.0
50.0
52.0
54.0
56.0
58.0
60.0
2008 2009 2010 2011 2012 Aug/2013
Assets of top five banks as a share in total assets percent
Loans of top five banks as a share in total loans
Deposits of top five banks as a share in total deposits
CFA Institute Research Challenge 20.02.14
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Appendix 23: Herfindahl-Hirschmann index values for EU countries
Country Market share of
top five banks (%) HH index (point)
Austria 36 395
Bulgaria 50 738
Czech Republic 61 999
Estonia 90 2,493
France 45 545
Germany 33 307
Greece 79 1,487
Italy 40 410
Latvia 64 1,027
Lithuania 84 1,749
The Netherlands 82 2,026
Poland 44 568
Portugal 71 1,191
Slovakia 72 1,221
Slovenia 58 1,115
Spain 51 654
Hungary 54 806
EU-27 average 59 1,066
Romania* 54 834
Source: ECB (Statistical Data Warehouse)
The Herfindahl index (also known as Herfindahl–Hirschman Index, or HHI) is a measure of the size of firms in relation to
the industry and an indicator of the amount of competition among them. Named after economists Orris C. Herfindahl and Albert O.
Hirschman, it is an economic concept widely applied in competition, antitrust and also technology management. It is defined as the
sum of the squares of the market shares of the 50 largest firms (or summed over all the firms if there are fewer than 50) within the
industry, where the market shares are expressed as fractions. The result is proportional to the average market share, weighted by
market share. As such, it can range from 0 to 1.0, moving from a huge number of very small firms to a single monopolistic producer.
Increases in the Herfindahl index generally indicate a decrease in competition and an increase of market power, whereas decreases
indicate the opposite. Alternatively, if whole percentages are used, the index ranges from 0 to 10,000 "points".
0
500
1,000
1,500
2,000
2,500
3,000
CFA Institute Research Challenge 20.02.14
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Appendix 24: Credit institutions and branches with foreign capital in EU countries
Country Assets of foreign-owned credit
institutions as a share in total
assets. (%)
Credit institutions (branches and subsidiaries)
with foreign capital. (Number)
Estonia 96.40 13
Lithuania 94.43 12
Czech Rep. 92.68 38
Romania* 90.80 36
Slovakia 88.36 26
Bulgaria 73.58 22
Poland 61.93 56
Latvia 61.32 16
Hungary 58.13 27
Slovenia 29.48 10
Austria 27.16 64
Portugal 22.49 35
Greece 15.42 27
The Netherlands 10.17 62
Italy 8.66 102
Spain 7.44 128
Germany 4.09 145
France 3.33 204
Aug. 2013
Source: ECB (Statistical Data Warehouse)
Appendix 25: Liability structure of credit institutions operating in Romania
Liabilities Dec.
2008
Dec.
2009
Dec.
2010
Dec.
2008
Dec.
2011
Jun.
2012
Aug.
2012
Dec.
2012
Mar.
2013
Aug.
2013
Domestic Liabilities, of which 69.3* 73.6 73.2 73.5 75.2 76.1 76.8 77.8 78.0 78.6
-Interbank deposits 2.1 5.4 3.4 3.4 5.0 4.7 4.6 2.5 2.2 1.9
-Government sector deposits 3.1 2.1 1.7 1.4 1.5 1.4 1.3 1.3 1.3 1.4
-Corporate deposits 20.2 19.3 19.0 19.0 17.7 18.3 18.5 18.9 19.1 19.5
-Houshold deposits 24.4 26.7 27.0 28.7 29.2 29.5 30.2 31.7 31.6 31.8
-Capital and reserves 10.6 12.0 14.2 16.2 16.9 17.3 18.0 18.8 19.3 19.7
-Other liabilities 8.9 8.1 7.9 4.8 4.9 4.9 4.2 4.6 4.4 4.3
-Foreign liabilities 30.7 26.4 26.8 26.5 24.8 23.9 23.2 22.2 22.0 21.4
*-percent of total liabilities
Source: NBR
CFA Institute Research Challenge 20.02.14
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Appendix 26: Financial intermediation, international comparison
Country Assets/GDP (%) Loans/GDP (%) Deposits/GDP (%)
Austria 315.50 112.44 104.66
Bulgaria 114.45 70.84 69.07
Czech Republic 125.86 55.35 75.04
Estonia 115.89 78.83 58.83
France 397.38 105.99 95.35
Germany 311.12 98.09 118.86
Greece 228.23 118.30 86.66
Italy 269.52 112.19 95.70
Latvia 128.49 65.59 37.74
Lithuania 74.25 48.99 38.95
The Netherlands 415.79 177.98 149.38
Poland 93.05 53.72 52.83
Portugal 337.13 152.32 127.45
Slovakia 83.54 49.54 56.81
Slovenia 143.23 84.59 58.93
Spain 341.21 156.76 145.02
Hungary 114.26 53.85 48.63
EU-27 351.72 120.03 113.43
Romania 68.93 38.44 33.58
Source: NBR, ECB (Statistical Data Warehouse)
Assets/GDP
Loans/GDP
Deposits/GDP
Max
Max
Max
The Netherlands 415.79 The Netherlands 177.98 The Netherlands 149.38
Min
Min
Min
Romania 68.93 Romania 38.44 Romania 33.58
Median
Median
Median
143.23
84.59
75.04
EU-27 351.72
120.03
113.43
Source: Team estimates
CFA Institute Research Challenge 20.02.14
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Appendix 27: Credit to households; lending for house purchase; RON
0.0
500,000.0
1,000,000.0
1,500,000.0
2,000,000.0
2,500,000.0
3,000,000.0
3,500,000.0
4,000,000.0
Jan
. 20
07
May
. 20
07
Sep
. 20
07
Jan
. 20
08
May
. 20
08
Sep
. 20
08
Jan
. 20
09
May
. 20
09
Sep
. 20
09
Jan
. 20
10
May
. 20
10
Sep
. 20
10
Jan
. 20
11
May
. 20
11
Sep
. 20
11
Jan
. 20
12
May
. 20
12
Sep
. 20
12
Jan
. 20
13
May
. 20
13
Sep
. 20
13
Ro
n T
ho
usa
nd
s
20,000,000.0
40,000,000.0
60,000,000.0
80,000,000.0
100,000,000.0
120,000,000.0
140,000,000.0
Jan
. 20
07
Ap
r. 2
007
Jul.
200
7
Oct
. 20
07
Jan
. 20
08
Ap
r. 2
008
Jul.
200
8
Oct
. 20
08
Jan
. 20
09
Ap
r. 2
009
Jul.
200
9
Oct
. 20
09
Jan
. 20
10
Ap
r. 2
010
Jul.
201
0
Oct
. 20
10
Jan
. 20
11
Ap
r. 2
011
Jul.
201
1
Oct
. 20
11
Jan
. 20
12
Ap
r. 2
012
Jul.
201
2
Oct
. 20
12
Jan
. 20
13
Ap
r. 2
013
Jul.
201
3
Oct
. 20
13
Ro
n T
ho
usa
nd
s
Credit to households (RON thousand) Deposit from households
CFA Institute Research Challenge 20.02.14
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Appendix 28: Bank distribution in terms of solvency ratio
Period 8 - 10% 10 - 12% 12 - 16% 16 - 20% 20 - 24% 24 - 30% above 30%
Number of banks
Dec/2008 2 6 9 4 2 3 6
Dec/2009 0 2 14 7 2 2 4
Dec/2010 0 2 16 7 0 3 4
Dec/2011 2 3 8 9 5 1 4
Jun/2012 1 4 10 7 6 0 4
Dec/2012 1 2 15 4 4 2 3
Mar/2013 1 4 15 6 0 1 4
Jun/2013 1 5 14 5 0 1 5
Source: NBR
Appendix 29: NPL ratio of credit institutions (%)
Source: NBR
Appendix 30: Distribution of credit institutions’ market share based on ROA
Source: NBR
0.00
5.00
10.00
15.00
20.00
25.00
Mar
/20
08
May
/20
08
Jul/
20
08
Sep
/20
08
No
v/2
00
8
Jan
/20
09
Mar
/20
09
May
/20
09
Jul/
20
09
Sep
/20
09
No
v/2
00
9
Jan
/20
10
Mar
/20
10
May
/20
10
Jul/
20
10
Sep
/20
10
No
v/2
01
0
Jan
/20
11
Mar
/20
11
May
/20
11
Jul/
20
11
Sep
/20
11
No
v/2
01
1
Jan
/20
12
Mar
/20
12
May
/20
12
Jul/
20
12
Sep
/20
12
No
v/2
01
2
Jan
/20
13
Mar
/20
13
May
/20
13
Period ROA<0 0≤ROA<1 1≤ROA<2 2≤<=ROA<3 ROA≥3
2008 9.9 22.8 32.2 6.7 28.3
2009 21.0 47.7 30.1 0.1 1.0
2010 21.9 53.6 21.7 2.8 0.0
2011 44.7 28.8 24.8 1.6 0.0
2012 59.8 18.2 19.8 2.2 0.0
CFA Institute Research Challenge 20.02.14
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Appendix 31: Romanian banking sector everyday transactions activity
Source: NBR
6,000,000
7,000,000
8,000,000
9,000,000
10,000,000
11,000,000
12,000,000
Mar
. 20
08
Sep
. 200
8
Mar
. 20
09
Sep
. 200
9
Mar
. 20
10
Sep
. 201
0
Mar
. 20
11
Sep
. 201
1
Mar
. 20
12
Sep
. 201
2
Mar
. 20
13
Sep
. 201
3
Active cards (units)
6,000
7,000
8,000
9,000
10,000
11,000
12,000
Mar
. 20
08
Au
g. 2
008
Jan
. 20
09
Jun
. 20
09
No
v. 2
00
9
Ap
r. 2
010
Sep
. 201
0
Feb
. 201
1
Jul.
201
1
Dec
. 20
11
May
. 20
12
Oct
. 20
12
Mar
. 20
13
Au
g. 2
013
ATMs (units)
60,000
70,000
80,000
90,000
100,000
110,000
120,000
130,000
140,000
Mar
. 20
08
Au
g. 2
008
Jan
. 20
09
Jun
. 20
09
No
v. 2
00
9
Ap
r. 2
010
Sep
. 201
0
Feb
. 201
1
Jul.
201
1
Dec
. 20
11
May
. 20
12
Oct
. 20
12
Mar
. 20
13
Au
g. 2
013
POS terminals (units)
11,500,000
12,000,000
12,500,000
13,000,000
13,500,000
14,000,000
14,500,000
Mar
. 20
08
Au
g. 2
008
Jan
. 20
09
Jun
. 20
09
No
v. 2
00
9
Ap
r. 2
010
Sep
. 201
0
Feb
. 201
1
Jul.
201
1
Dec
. 20
11
May
. 20
12
Oct
. 20
12
Mar
. 20
13
Au
g. 2
013
Cards in circulation (units)
CFA Institute Research Challenge 20.02.14
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Appendix 32: Porter Analysis
Threat of Entry
1. Capital Requirements
2. Product differentiation for overcoming customer
loyalty
3. NBR supervision
4. Existence of economies of scale
Bargaining power of suppliers
1. Specialized labor force required
2. Limited number of input sources
3. Strong position of labor unions
Bargaining power of customers
1. Undifferentiated product
2. Price sensitivity of customers
3. Large volume customers
Threat of Substitute Products
1. No perfect substitute for loans
2. Substandard product
3. Government programs existence
Competition in the industry
1. Relatively large competitors
2. Law product differentiation.
3. Fixed costs are high
4. The rivals are diverse in strategies
5. High exit barriers
Source: Team Estimates
Threat of Entry
Bargaining power ofsuppliers
Bargaining power ofcustomers
Threat of SubstituteProducts
Competition in theindustry
Scale of interaction
0 No interaction
1 Insignificant
2 Low
3 Average
4 High
5 Very high
Forces Points
Threat of Entry 3
Bargaining power of suppliers 3
Bargaining power of customers 2
Threat of Substitute Products 2
Competition in the industry 4
Final rating 2.2
CFA Institute Research Challenge 20.02.14
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Appendix 33: BT and BRD equity comparison
Source: Bloomberg
Appendix 34: BET2, BET-C3, CECEBNK4, SX7E5 Index comparison with BT
2 Bucharest Stock Exchange Trading Index 3 BET-composite 4 The CECE Banking Index consists of blue chip stocks of the banking sector which are traded on stock exchanges in the region of
Central, Eastern and South-eastern Europe 5 SX7E – Euro STOXX Banks index
0.8
0.9
1
1.1
1.2
1.3
1.4
1.5
1.6
1.7
1.8
TLV RO equity BRD (Reference date 01.03.2013 )
0.8
0.9
1
1.1
1.2
1.3
1.4
1.5
1.6
1.7
1.8
Jan-13 Feb-13 Mar-13 Apr-13 May-13 Jun-13 Jul-13 Aug-13 Sep-13 Oct-13 Nov-13 Dec-13 Jan-14 Feb-14
BET-C Index (Reference date 01.03.2013 ) TLV RO equity
SX7E Index (Reference date 01.03.2013) CECEBNK Index (Reference date 01.03.2013)
BET Index ( Referrence date 01.03.2013)
CFA Institute Research Challenge 20.02.14
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Appendix 35: BET, WIG6, BUX7 and FTASE8 Index comparison
Source: Bloomberg
Appendix 36: Regression Analysis
We have conducted simple regression analysis between BT returns and BET index returns in order to identify the value
Beta.
Dependent Variable: TLV_CLOSE_PRICE_RETURN
Method: Least Squares
Sample: 1 271
Included observations: 271
Variable Coefficient STd. Error t-Statistics Prob.
BET_INDEXRETURN 1.166806 0.091560 12.74367 0.0000
R-squared 0.372131 Mean dependent var. 0.104347
Adjusted R-squared 0.372131 S.D dependent var. 1.406576
S.E of regression 1.114546 Akaike info criterion 3.058454
Sum squared residuals 335.3974 Schwarz criterion 3.071746
Log likelihood -413.4206 Hannan-Quinn criterion 3.063791
Durbin-Watson statistics 1.918392
Source: Team estimates
6 WIG – Warsaw stock exchange index 7 BUX-Budapest stock exchange index 8 FTASE – FTSE/Athens stock exchange large cap index
0
0.2
0.4
0.6
0.8
1
1.2
1.4
Jan
-11
Feb
-11
Mar
-11
Ap
r-1
1
May
-11
Jun
-11
Jul-
11
Au
g-1
1
Sep
-11
Oct
-11
No
v-1
1
Dec
-11
Jan
-12
Feb
-12
Mar
-12
Ap
r-1
2
May
-12
Jun
-12
Jul-
12
Au
g-1
2
Sep
-12
Oct
-12
No
v-1
2
Dec
-12
Jan
-13
Feb
-13
Mar
-13
Ap
r-1
3
May
-13
Jun
-13
BET (RO) WIG (PL) BUX (HU) FTASE (GR)
CFA Institute Research Challenge 20.02.14
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Appendix 37: Objectives and results of BT (2013
Objectives of BT for 2013 Results (based on Dec 2013)
Total assets: 8% increase + 8.4%
Total credits: 8% increase + 7.83%
Total resources from clients: 10% increase + 11.07 %
Credits / Deposits: 74.63% 74.25%
Cost / Income: maximum 52% 48.7%
Source: Company data
Appendix 38: Corporate Governance
OECD Criteria BT’s score for
each criteria
BT’s score
after applying
weights
Ensuring the Basis for an Effective
Corporate Governance Framework 10 1
The Rights of Shareholders and Key
Ownership Functions 9 1.8
The Equitable Treatment of
Shareholders 8 1.6
The Role of Stakeholders in
Corporate Governance 10 1
Disclosure and Transparency 9 1.8
The Responsibilities of the Board 9 1.8
SUM 9
Source: Team estimates
10%
10%
20%
20%
20%
20%
CFA Institute Research Challenge 20.02.14
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Appendix 39: Risk matrix
Increase in
energy and
labor costs
Currency
risk
BT’s
competitors
Trading
losses
Non-
Performing
Loans
Romania
enters
Eurozone
Company
identity
Source: Team estimates
Appendix 40: Monte Carlo Simulation for Residual Income model based on long-term growth rate changes
Source: Team estimates
0.00%
1.00%
2.00%
3.00%
4.00%
5.00%
6.00%
7.00%
8.00%
9.00%
10.00%
Market risk Economic
risk
Operational
risk
Insignificant Moderate Severe
Lo
w
Mo
der
ate
H
igh
IMPACT
PP
RO
BA
BIL
IT
Y
Disclosures: Ownership and material conflicts of interest:
The authors, or a member of their household, of this report do not hold a financial interest in the securities of this company.
The authors, or a member of their household, of this report do not know of the existence of any conflicts of interest that might bias the content
or publication of this report.
Receipt of compensation:
Compensation of the author(s) of this report is not based on investment banking revenue.
Position as a officer or director:
The authors or a member of their household do not serve as an officer, director or advisory board member of the subject company.
Market making:
The authors do not act as a market maker in the subject company’s securities.
Disclaimer:
The information set forth herein has been obtained or derived from sources generally available to the public and believed by the author(s) to be
reliable, but the authors do not make any representation or warranty, express or implied, as to its accuracy or completeness. The information is
not intended to be used as the basis of any investment decisions by any person or entity. This information does not constitute investment advice,
nor is it an offer or a solicitation of an offer to buy or sell any security. This report should not be considered to be a recommendation by any
individual affiliated with CFA Society Romania or the CFA Institute Research Challenge with regard to this company’s stock.
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