Vestjysk Bank: Suffering bond portfolio behind downgrade - ABG

Net profit guidance downgraded to DKK 500m-600m

Bond portfolio suffering from increasing interest rates

Core banking operations and loss levels still in line

Trading income hurt by increasing interest rates
On Monday morning Vestjysk downgraded its FY’22 net profit guidance to DKK 500m-600m (600m-650m) based on a negative performance of its bond portfolio. This means increasing interest rates have led to a continued loss on trading income throughout Q3’22, which we also expect to be the case for Q4’22. We have therefore factored in trading income levels equal to Q1’22 and Q2’22, resulting in losses of DKK 66m in Q3’22e and DKK 38m in Q4’22e (see page 3). The downgrade is of technical character as the losses are unrealised and Vestjysk will hold the bonds until maturity and will thus be repaid at face value. The bond portfolio’s composition, primarily short-term bonds, means that we expect the losses to reverse in the beginning of 2023, and all else equal also be positive going into 2024-25. This means that the downgrade does not change the overall outlook presented in our report of 3 August.

Core operations still on positive path
Vestjysk has guided that its core banking operations and loan losses remain at the expected levels. This includes a positive effect on NII from the increasing interest rates, where we have factored in a DKK 23m positive effect in H2’22e due to the rate hikes. Vestjysk had a deferred tax asset of DKK 267m at the end of Q2’22, but we do not expect it to increase its use of this to offset the reported losses on trading income in 2022 but to stick to the stated plan of using it over the coming years.

Estimate changes suggest net profit in low end of guidance
With our estimate changes for trading income, we now expect FY’22 net profit in the low end of the new guidance, at DKK 513m. We revise our expectation for Vestjysk’s reintroduced dividend to DKK 0.21 (0.26) per share for FY’22 as we expect a dividend payout ratio of 50%, equalling a ’22e dividend ...
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