Vestjysk Bank: Cements stable position with prospective dividend - ABG

Continued focus on a diversified loan book

Top-notch ROE expected to normalise at ~9%

Expected dividend yield of 8% in 2022e

Loan losses expected to remain under control
With a change of analyst, we have thoroughly reviewed our estimates for Vestjysk Bank. The period of high loan losses in Vestjysk is over, in our view, with recent years showing low and decreasing loan losses. Vestjysk is in an ongoing process of diversifying its loan book away from agriculture, with its exposure to this industry down to 11% from 17% in 2017. We believe the loan losses will remain at low levels, making room for Vestjysk to exploit the earnings shield in the years to come.

Better outlook for agricultural exposure
Despite the ongoing diversification away from agriculture, the sector is still an important one for Vestjysk. We have a positive view, as Vestjysk is focused on more profitable and efficient farmers, and conditions for milk producers (3.4% of exposure) in particular appear positive. Pig farmers (5.3% of exposure) still face uncertainty and risks, but seem to be through their roughest patch, supporting our belief in continued low loan losses. This supports our belief that Vestjysk will meet its ROE target above 9% in ‘22e on higher NII, stable costs and controlled loan losses.

Long-awaited dividends in sight
The solid profitability seen in recent years has left Vestjysk well-capitalised. According to our estimates, Vestjysk will have a ‘24e CET1 ratio of 17.9% after an expected relaunch of dividends in 2022 – the first time since 2007. We expect a payout of 50% of net profit, corresponding to a yield of 8% in ‘22e. In our view, Vestjysk is likely to offer stable profitability and dividend yield in the coming years. Despite showing the third-worst year-to-date performance in its peer group at -3.4% (peer avg. +2.4%) Vestjysk is trading in line with peers when we look at the ‘24e adj. P/E of 7.7x vs. the peer average of 7.8x.
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