THIS REPORT WAS PREPARED BY FRANCISCO LOPES, A MASTERS IN FINANCE STUDENT OF THE NOVA SCHOOL OF BUSINESS AND
ECONOMICS, EXCLUSIVELY FOR ACADEMIC PURPOSES. THIS REPORT WAS SUPERVISED BY ROSÁRIO ANDRÉ WHO REVIEWED THE
VALUATION METHODOLOGY AND THE FINANCIAL MODEL. (SEE DISCLOSURES AND DISCLAIMERS AT END OF DOCUMENT)
See more information at WWW.NOVASBE.PT Page 1/37
MASTERS IN FINANCE
EQUITY RESEARCH
BANCO BPI, SA COMPANY REPORT
BANKING SECTOR 03 JUNE 2013
FRANCISCO DA SILVA CARRILHO DUARTE LOPES [email protected]
Banco BPI, a good investment?
Opportunity in the heart of the Euro-zone crisis
Recommendation: BUY
Potential + 28.55%
Price Target FY13: 1.33 €
Price (as of 3-Jun-13)Sa 1.03 €
Reuters: BBPI.LS, Bloomberg: BPI PL
52-week range (€) 0.38-1.38
Market Cap (€Mn) 1,433
Outstanding Shares 1,390,000,000
Source: Bloomberg
Source: Bloomberg
(Values in € millions) 2012 2013E 2014F
NII 549 581 710
NIM 1.56% 1.61% 1.90%
Banking Income 1330 1254 1442
Provisions and Impairments 269 389 356
Operational Costs 930 1152 1118
Net Income 249 5 169
Cost-to-Income 48.1% 61% 52.9%
Loans/Deposits ratio 106% 108% 110%
Core Tier 1 15% 15.1% 15.2%
ROE 14.6% 0.23% 7.05%
EPS (€) 0.21 0.004 0.12
Source: Company Data, Nova ER Team
Our recent forecast points towards a final year 2013
price target of 1.33 € per share, representing a potential
increase in value of 28.55%.
Besides the € 249 million profit in 2012, € 400 million
were extraordinary, resulting from appreciation in Sovereign
Debt Securities. Thus, these were a non-recurrent income.
In 2013 we forecast € 5 million consolidated profit,
as Net Interest Income continues to be penalized by higher
financing costs and low spreads on mortgage loans contracted
the years before.
The domestic activity is expected to be under
pressure until economic growth resumes. In 2013 we
forecast € 74 million negative results for the Portuguese
activity, mainly due to reduced Net Interest Income and still
high credit impairments.
BPI’s foreign activity will continue to perform well,
as Angola and Mozambique economic performance remains
strong, both countries growing above 6%, foreign results will
be the engine of the bank at least until 2015.
Political stability in Portugal is not as strong as it
was 6 months ago, with political speech becoming radicalized,
however until no majority is revealed on polls no elections are
anticipated.
BANCO BPI, SA COMPANY REPORT
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Table of Contents
Banco BPI, SA 3
Description 3
Shareholder Structure 5
Valuation Methodology 6
The Cost of Equity 6
Portugal 8
Portuguese Economy 8
Portuguese Banking System 11
Scenarios for Banco BPI in Portugal 14
Repayment of CoCos 19
Angola 22
Scenarios for BFA in Angola 23
Mozambique 25
Scenarios for BCI in Mozambique 26
Valuation Summary 30
Appendix 34
BANCO BPI, SA COMPANY REPORT
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Banco BPI, S.A.
Description
Banco BPI (Banco Português de Investimento), SA was founded in the city of
Oporto in 1981 originally as an Investment Company; the bank entered the
commercial banking activity by acquiring several existing banks during the early
nineties, and then grew organically during the mid-nineties and the new century
following the growth of the Portuguese economy. The Bank is currently one of the
major Portuguese banks and is listed on the main Portuguese Stock Index, PSI
20 and its market capitalization is € 1,441 Million and its total assets are worth €
44,500 Million.
The activity of Banco BPI can be divided into four main segments: commercial
banking, investment banking, asset management and insurance. The asset
management division operates through the management of several investment
and retirement funds and benefits from high-patrimony individuals captured by
the commercial banking segment. The insurance segment operates through
Allianz and Euler Hermes, which BPI owns 65% and 50% respectively. The
investment banking division comprises four different sub-segments: stocks,
corporate finance, private equity and private banking; with corporate finance
operating in Portugal, Spain, France, Switzerland and South Africa. The
commercial banking activity is the most important segment of the Bank, operating
in Portugal through Banco BPI, in Angola through Banco de Fomento Angola
(where BPI owns 50.1% stake) and in Mozambique through a partnership with
CGD (the State owned Portuguese Bank) in Banco Comercial e de Investimentos
(where BPI has a 30% stake).
The domestic activity (commercial banking, investment banking and others) is
still the most important one, as it represents 77%1 of the banking income of BPI,
moreover, 96% of the credit is allocated in the domestic market and 89% of total
assets are allocated in Portugal. Within the domestic commercial activity the
bank has always been more focused on providing credit to mortgage loans,
which represent 81% of total credit and represent a market share of 10.3% in the
Portuguese mortgage loans market. Consumer credit can be divided into three
main categories: personal credit (5% of total loans), car loans (1.3% of total
loans) and credit card loans (1% of total loans). Corporate clients, small and
medium enterprises or large multi business corporations, represent only 11% of
total loans. This credit structure is not particularly good for BPI, as most of the
credit is mortgage loans, which has small, non-negotiable spreads, mostly
1 Source: BPI, annual report 2012
Political consensus in the application of the MoU
BANCO BPI, SA COMPANY REPORT
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contracted in the first half of the decade, during the construction boom in
Portugal; moreover these loans, due to their nature, have long-term maturities,
locking the revenue of the bank for long periods in time. Regarding resources
from customers, time deposits are the most important segment, representing
54% of total customer’s resources. Moreover, sight deposits represent 18%,
structured products 8.2% and investment funds represent 5.5% of total
customer’s resources. In 2012 the domestic activity had higher profits than the
international segment for the first time since 2008 (Exhibit 1), mostly due to the
appreciation of Portuguese Government Bonds, which pushed results of the
domestic activity towards € 160 million, comparing with € 87 million of
international results. Since the international crisis origin in 2008 that the
Portuguese economy is facing huge difficulties, later worsened by the euro-zone
sovereign debt crisis, resulting in the bankruptcy of thousands of companies and
cancelation or postponement of numerous investments, making credit
impairments to exponentially rise since 2008, being a crucial factor in the
negative performance of the domestic activity, comparing to the international
counterpart (Exhibit 2).
The international activity of the bank is either developed by its retail business
abroad or investment banking services. As expected, the international exposure
is primarily concentrated in countries with special ties to Portugal and Portuguese
companies, namely ex-colonies or important trade partners. As such, the bank
expanded its commercial banking activities to Angola and Mozambique and has
branches in France and Spain specially targeting Portuguese communities. In the
last few years the International activity has been increasing its importance in
BPI’s net income and banking income (Exhibits 1 and 3).
Comparing to the other Portuguese main private banks, BPI is the smallest but
the most capitalized bank and the one with the process of internal restructuring
more advanced. In terms of size BPI has € 44,565 million worth of assets, while
BES8 has € 83,691 million and BCP
9 has € 89,744 million. Regarding total credit
BPI has € 30,519 million, comparing to € 50,399 million from BES and € 61,618
million from BCP. In customer deposits BPI has € 24,600 million, while BES has
€ 34,540 million and BCP has € 49,390 million. In terms of capitalization BPI is
the bank with the highest Core Tier I ratio, 15%, while BES has 10.5% and BCP
12.4%. The transformation ratio, loans-to-deposits ratio, an important measure of
bank’s leverage, BPI has 106%, while BES has 137% and BCP 128%, with
banks obliged to achieve a ratio of below 120% by final year 2014. When looking
at the credit at risk of impairment, BPI has 4.2% compared to 9.4% of BES and
13.1% of BCP. In 2012, Return on Equity in BPI was 12.9%, while BES had 1.2%
and BCP had an impressive -35.4%. In terms of long-term credit rating, BPI and
Source: BPI official accounts
Source: BPI official accounts
Source: BPI official accounts
Exhibit 1: Domestic and International
Results of BPI 2008-2012
Exhibit 2: Credit Impairments in the Domestic and International activities
2008-2012
Exhibit 3: Domestic and International banking Income 2008-2012
BANCO BPI, SA COMPANY REPORT
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BES are considered BB- and BCP is considered B+, all measured by Standard
and Poor’s.
Shareholder Structure
Banco BPI has a solid shareholder structure (Graph 1), where institutional
investors own approximately 80% of the bank, giving BPI’s administration an
important support when taking strategic decisions. The La Caixa group owns
46.2% of Banco BPI being the largest shareholder, followed by Santoro Financial
Holdings with 19.5% (an Angolan Private Company whose CEO is Isabel dos
Santos, daughter of José Eduardo dos Santos, the President of the Angolan
Republic), the third largest shareholder is the strategic partner Allianz with 8.8%
of the shares. Other institutional investors include HVF, Arsopi and AutoSueco.
The remaining 20% are free-float traded in the Lisbon Stock Exchange.
Before entering in detail in the valuation of BPI, we want to discuss the
availability of the current strategic shareholders to participate in future capital
increases. To the La Caixa group, BPI is an extremely important partner, as it
allows the group to provide “Iberian Business Solutions”2 and considers the
Angolan subsidiary of BPI (BFA) a “leading position, in an emerging economy
experiencing major growth in recent years”. Moreover the group aims to “support
its customers in their foreign trade endeavours and investment projects,
anywhere in the world”. In this case, and due to the importance of the Iberian
market to the group, we believe that La Caixa will support and subscribe any
possible capital increases in the future. Regarding Santoro Financial Holdings
(second largest shareholder, 19.5% stake), BPI is an important financial
institution in a country with a tight connection to Angola, which can support
activities promoted by the company through subsidiaries or partners; moreover
Santoro Financial Holding has consecutively increased its participation in the
bank in the last few years, and by that we consider the company willing to
participate in future capital increases.
2 Source: La Caixa 2012 Annual Report.
BANCO BPI, SA COMPANY REPORT
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Valuation of Banco BPI, S.A.
Valuation Methodology
In this report we are going to value Banco BPI, S.A by the sum of the parts
method, i.e. we will value separately the Portuguese activity, the Angolan activity
and the Mozambique’s activity. By using the sum of the parts method we will get
a better understanding on which geography most contributes to the value of the
bank. Moreover we will use the Free Cash Flow to Equity method, more
appropriate to financial institutions, to value the separate operations.
Cost of Equity
The cost of equity is an important measure to discount the expected Free Cash
Flow to Equity. In our valuation we will use the Capital Asset Pricing Model
(CAPM3) to find the appropriate Cost of Equity. However, we will make a slight
modification in the formula in order to capture the systematic risk of the different
geographies. Instead of just using the beta of the company as it is usually done,
we developed a beta which captures the correlation of BPI with MSCI World (the
Index used as the Market Portfolio) and the correlation of the different
geographies with the same Index, the Market Portfolio; it is simply done by
multiplying both betas. When both betas are multiplied we get a new beta which
captures the systematic risk of the stock towards the market portfolio and the
systematic risk of the country towards the market portfolio. In this way, we
discounted the Portuguese operations with a different Cost of Equity than the
Angolan’s or the Mozambique’s operations, i.e. we used a different cost of equity
for each of the geographies. Below, we carefully describe how we computed the
different Cost of Equities and we present its values.
First, we need a Risk-Free Rate, an interest rate at which we can invest our
capital and be 100% confident that we will recover our money back. One can
possibly argue that, at this moment, in the world, there is simply not any
investment that guarantees our money back with 100% certainty, but the market
is pricing some Euro-Zone Government Bonds of AAA countries as such
investments. As interest rates are historically low, and we are discounting cash-
flows that will only occur in the long-term, e.g. the terminal value, we conducted a
small study to find a more suitable risk-free rate for both times of crisis and
economic expansion. The idea is to find a risk-free rate from a basket of Euro-
Zone countries but considering periods of economic expansion, say from 2008
until nowadays. We first selected the four Euro-Zone countries that are classified
3 CAPM : Cost of Equity = Risk-Free Rate + (Company Beta * Country Systematic Risk) * Market Risk Premium
BANCO BPI, SA COMPANY REPORT
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as AAA by the three main Credit Agencies (S&P, Fitch and Moody’s) and we got
Germany, the Netherlands, Denmark and Finland4. We then computed the
average of the last five years yield to maturity on their respective 10 year
Government Bonds, we got 2.69% for Germany, 3.02% for the Netherlands,
3.01% for Finland and 2.86% for Denmark. Our Risk-Free Rate will be the
average of these: 2.90%.
Secondly, we computed the usual beta for BPI, using three year, weekly
observations and the MSCI World as the Market Portfolio; we got a beta of 1.55,
which indicates that BPI’s stock is 55% more volatile than the Market Portfolio.
Thirdly, we computed the three different betas for each of the geographies, in
order to capture the systematic risk of each country:
The “Portuguese beta” was computed by regressing the PSI20 Index, the most
liquid and best representative Index of the Portuguese economy, with the MSCI
World. For that we got a beta of 1.16, indicating that the Portuguese market is
16% more volatile than the World’s market, i.e. the Portuguese market responds
with 16% more volatility to external shocks than the World’s Market portfolio.
In Angola we don’t have a liquid and representative Index of the Angolan
economy; as so, we must choose a proxy in order to capture the country’s
systematic risk. In Angola, the oil sector represents 50% of the GDP, and the
country exports are completely dominated by oil products; as so, we will use the
oil price as the proxy for the Angolan economy. Once again, regressing the Oil
price with the MSCI World we got a beta of 0.72.
In Mozambique we have even a further more difficult problem: Mozambique does
not have a liquid and representative Index of its economy as with Angola,
however Mozambique is currently a country where the agricultural activity
accounts for 31% of the GDP, but that is going to change in the near future, as
the Natural Gas production is starting to develop, transforming the country’s GDP
into something similar to Angola but instead of the oil being the engine of the
economy it will be the natural gas. As so, it does not make sense to find the
current beta for Mozambique, as it will certainly change in the future. We must
look for a country which has the GDP dominated by gas production and by
finding its beta we get a good proxy for Mozambique’s future beta; that country
would be Algeria, it fits perfectly our criteria (GDP dominated by Gas production,
Gas exports dominate total exports, being an African country, proximity to
European Countries, amongst others) however there is no stock index in the
country. To overcome the difficulty of finding a proxy for Mozambique we must
reduce the desired similarity of the countries and broaden our search; two
4 We did not include Luxembourg in our study as it does not currently have a 10 year Government Bond outstanding
BANCO BPI, SA COMPANY REPORT
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countries have both a relevant weight of natural resources in their GDP, in their
exports, are developing countries, have liquid stock indexes and have tight
relations to Developed countries: Saudi Arabia and Indonesia. And due to the
weight of oil in Saudi Arabia (although Saudi Arabia is the world 8th Natural Gas
producer) we chose Indonesia. Indonesia is a much more advanced country, with
its GDP growing at 6% quickly towards the 1 trillion Euros barrier. Agriculture still
accounts 15% of its GDP, with the Gas industry accounting for 12% and the
Industry with 24%. The Jakarta stock exchange Index regressed with the MSCI
World both in Euros delivers a beta of 0.98.
The table 1, below, summarises the used cost-of-equities:
CAPM per geography
CAPM Portugal Angola Mozambique
Risk-Free Rate 2,90% 2,90% 2,90%
Market Premium 5% 5% 5%
BPI Beta 1,55 1,55 1,55
Country Beta 1,16 0,72 0,98
Cost of Equity 11,88% 8,51% 10,47%
Table 1 : Cost of Equity Source: NOVA ER Team
Portugal
Portuguese Macroeconomic Environment
In the last two years the Portuguese economic and political discussion have been
marked by the application of the Memorandum of Understanding (MoU) signed
by the Portuguese government and the Troika (European Commission, ECB and
IMF) in May 2011. The MoU was signed by the three main Portuguese parties,
the Socialist party, the Social-Democrat party and the Popular party, which
represent altogether 90% of the seats in the Portuguese national parliament,
assuring a huge majority in the application of the measures agreed. Moreover,
the Portuguese political stability is seen as a key strength of Portugal in assuring
the application of the MoU. The commitment shown by the Portuguese
government in the application of the MoU has been much appreciated by
investors, originating a steady decrease in the yields of the Portuguese
Government Bonds since the beginning of 2012, and the tightening of the spread
Source: Bloomberg
Source: Bloomberg
Exhibit 4: Yields on Portuguese 10 year Government Bonds
Exhibit 5: Spread between Portuguese and German 10 year Government Bonds Yields
BANCO BPI, SA COMPANY REPORT
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between the yields on Portuguese and German Government Bonds (Exhibits 4
and 5 respectively)5. Besides Portugal’s credit rating by S&P, Moody’s and Fitch
of BB, Ba3 and BB+ respectively, there have been significant improvements in
the access of foreign capital markets by Portuguese companies. In the last
semester of 2012 and first semester of 2013 several companies such as Banco
Espírito Santo, Brisa, EDP, Mota Engil, PT, REN and Semapa accessed markets
by issuing long-term debt, reflecting a reopening of financial markets to stronger
and reliable Portuguese companies.
It is important to keep track of the political scene in Portugal. In the event of new
elections it is almost certain that Portugal would need a new financial rescue
package with important implications in the economic environment, as more
austerity would worsen economic conditions which would affect the corporate
sector and certainly the banking sector. Besides the MoU was signed by the
three main parties, increased instability has risen in the political discussion in the
first half of 2013. Repetitive new austerity measures to face unexpected lower tax
revenues due to worsened economic conditions has been creating instability in
the political scene, as the major opposition party (Socialist party) has demarked
itself from the austerity policy and introduced in its political speech the variable
economic growth, which in their view (correctly) is essential for Portugal to exit
the current recession spiral, however Portuguese citizens must not confuse
economic growth with the need for austerity, as public deficit is still over the
target of 4.5% by final year 2013. The Socialist party has repeatedly asked for
new elections, as the coalition currently in power (Social Democrat party and
Popular party) seem to be continuously chasing the deficit target instead of
having things under control, and demand higher sacrifices to the Portuguese
citizens; moreover there have been signs of internal instability in the coalition, as
the Popular party publicly said that it will not tolerate more sacrifices imposed to
the retirees, as they have already been asked to contribute with a large share.
The President, Mr. Cavaco Silva, has been under pressure, as he is the one with
the power to dissolve the national assembly and impose new elections, however
that hypothesis is still far away, mainly because although the Socialist party is
ahead on recent public polls it does not have a majority of the votes, which would
be an even greater cause of political instability in the country. Thus, the political
speech in Portugal has become more radicalized and less prone to national
consensus, it is true that the probability of new elections is higher than a few
months ago, however it is yet a rather remote possibility.
The Portuguese economy, in the process of correction of the structural
imbalances, will face the third consecutive year of recession in 2013, with a
5 Source: Bloomberg
Political speech is more radicalized, the coalition is facing internal instability and the Socialist party asks for new elections.
BANCO BPI, SA COMPANY REPORT
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projected GDP contraction of 2.3% (Table 2). The internal demand is going to
decrease by 4.2% in 2013, making a cumulative reduction of 17% in the 2011-
2013 period, as the private and public entities are still in the process of
deleveraging and the economic activity worsens. The private consumption,
projected to decrease 3.8% in 2013, is being strongly conditioned by the
increased taxation, both direct and indirect, and also the worsening of the labour
market conditions, with unemployment rising and breaking records in the
country’s history, 15.7% unemployment in 2012 and 18.3% in 20136, reducing
families disposable income. The public consumption is expected to decrease
2.4% in 2013 as the Government is aiming towards a 4.5% public budget deficit
in 2013, to meet the goal established in the MoU with the Troika, however this
target might be relaxed towards a larger number as the economic conditions get
worse than expected. The gross fixed capital formation has been the most hit
economic variable, it is expected to decrease 7.1% in 2013. The depressed
economic activity lowers the will and need to invest in new projects or in
increasing the capacity of existing projects, negatively affecting this variable.
The good news is the adjustment occurring in the external accounts, namely the
current account, which was traditionally negative in Portugal and in 2012 turned
positive to 0.8% of GDP and is projected to be 3.6% positive in 2013. To this
situation is positively contributing the balance of transfers which now represents
5% of GDP and the trade balance which in 2012 was virtually zero and in 2013
became positive by 2.8% and is expected to rise to 3.8% in 2014, as exports
keep rising and imports decrease, mainly affected by the reduction in internal
demand. Exports have been rising significantly mainly due to the extraordinary
behaviour and commitment of Portuguese export companies, which were forced
to search new markets for their products as the domestic market declined
significantly and upgraded themselves into a more efficient and competitive
production of their products; because although exports are rising, that cannot be
explained either by the government’s act or impressive external growth, on the
contrary, government is still very late in the implementation of structural reforms
that would help companies, such as reducing bureaucracy, faster justice system,
lower energy costs due to revision of the so called rent contracts, amongst
others; while the euro-area, the Portuguese main client, had a recession of 0.6%
in 2012 and is expected to have another recession of 0.3% in 2013, which does
not favour Portuguese exports. Apart from that, Exports are expected to rise
2.2% in 2013 and 4.3% in 2014, while imports are expected to decrease 2.9% in
2013 and increase 2.7% in 2014. Negatively contributing to the current account is
the income balance, which in 2012 was of -3.9% of GDP and is expected to stay
6 Source: International Monetary Fund, World Economic Outlook, April 2013
The Portuguese economy will fall 2.3% in 2013, the third consecutive recession. Investment and private consumption are the most hit variables, decreasing 7.1% and 3.8% respectively.
The external adjustment is the only good news during this period of correction of structural imbalances. The current account is expected to be positive by 3.6% of GDP in 2013.
BANCO BPI, SA COMPANY REPORT
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at that level until 2014. Besides the significant improvement in external accounts,
this subject has been away from the main public and political debate, which is
much more focused in the macroeconomic effects of the austerity policy, namely
the unemployment and the economic recession.
Portuguese Economic Projections (2013-2014) All values in Per cent change
2012 2013E 2014F
GDP -3.2 -2.3 1.1
Private Consumption -5.6 -3.8 -0.4
Public Consumption -4.4 -2.4 1.5
GFCF -14.5 -7.1 1.9
Internal Demand -6.8 -4.2 0.4
Exports 3.3 2.2 4.3
Imports -6.9 -2.9 2.7
Inflation 2.8 0.7 1.0
Table 2 : Portuguese Economy Data Source: Bank of Portugal
The economy of the euro-zone decreased 0.6% in 2012 and is expected to
decrease 0.3% in 2013 with a modest growth of 1% in 20147. The fact that the
euro-zone is economically weak does not favour the Portuguese exports, as the
main buyers of Portuguese products are Spain (25%), Germany (13.5%), France
(12.1%) and the United Kingdom (5.1%).
Portuguese Banking System
The main banks in the Portuguese Banking system are Banco Espírito Santo
(BES)8, Banco Comercial Português (BCP)
9, Banco Português de Investimento
(BPI) and the state-owned Caixa Geral de Depósitos (CGD). Contrary to large
European banks who have operations worldwide and to whom domestic revenue
is a small proportion of the entire revenue, Portuguese banks are still much
dependent on domestic results as it still is their primary market; as so, the entire
banking system suffers when the domestic economy enters in recession, as
results from branches and subsidiaries located abroad do not yet have a large
weight on the banks activity. Regarding the stock performance of the main
Portuguese banks (Exhibit 6) we observe that, since the beginning of 2013, BCP
is the bank with the highest appreciation, 40% year to date, BPI is appreciating
4% and BES is losing 20%. Moreover, BPI’s appreciation is in line with PSI 20
7 Source: International Monetary Fund, World Economic Outlook, April 2013
8 Bloomberg ticker: BES PL
9 Bloomberg ticker: BCP PL
BANCO BPI, SA COMPANY REPORT
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index and SX7P index (major banks in Europe), while both BCP and BES have
been deviating in different trajectories from the main Portuguese Index. The fact
that BPI is in line with PSI 20 and SX7P indexes for at least 2 months is in itself a
very interesting fact, which might indicate that the share is now reacting only to
Portuguese and European economic and political news, while internal factors
matter less at this point. In the opposite way, both BCP and BES shares’
behaviour indicate that internal factors still matter in the shares’ valuation. BCP’s
appreciation in 2013 is quite impressive when compared to its peers and
because investors should worry on the capacity of the bank to pay back its loan
to the Portuguese government (subordinated convertible debt); or else, the state
will become a shareholder with a large share of the bank, diluting all other
shareholders10
.
Exhibit 6 - Stock market performance of major Portuguese banks, PSI 20 and
SX7P Indexes.
Regarding the past year, banks had a challenging year, as they had to meet a
Core Tier 1 ratio of 10% by the end of 201211
. To achieve this target BPI and
BCP had to resort to the credit line made available by the government, € 1,500
million and € 3,000 million respectively, along with issuance of new capital while
the state-owned CGD increased its capital by 1,650 million Euros. BES was the
only bank that did not required funds from the state in order to comply with the
regulatory obligations; instead it issued new capital, by the amount of 1,000
million Euros12
. It is important to notice that both BPI and BCP have a strict
schedule do repay the money accessed through the credit line, otherwise the
10
Notice that BCP accessed the state’s credit line by the amount of 3,000 million euro, repayable in 5 years; otherwise it
will convert into ordinary shares. 11
Condition imposed in the MoU 12
Source: BES, 2012 annual report
Source: Bank of Portugal
Exhibit 7: loan Impairments in the Portuguese Banking System
BANCO BPI, SA COMPANY REPORT
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state will become shareholder of the banks, and will have an important stake,
diluting all other investors.
In 2013 banks are facing two great challenges that will have a significant impact
in their balance sheets and will weight negatively on results: loan impairments
and the deleverage program aiming towards a transformation ratio (loan to
deposit ratio) of 120% by year end 201413
. Due to the worsening of the
macroeconomic environment in the last five years, the default on credit payments
have been increasing (Exhibit 7) and it is expected to keep rising as new
austerity measures impact the economy throughout the year of 2013. The
evolution of non-performing loans is expected to follow close the economic
conditions, as so, it is expected that the last quarter of 2013 will be the turning
point in non-performing loans, hopefully initiating a steady decrease of credit loan
defaults. Regarding the achievement of the required Loan to Deposit ratio of
120% by year end 2014, banks have been making a strong effort in deleveraging
their operations since the second semester of 2010 (Exhibits 8 and 9); in June of
2010 the transformation ratio of the whole system was 151% and in June 2012 it
was already 124%, a 27pp reduction in two years. If we look at the total credit
given by banks we can see a clear reduction since June 2010 and June 2012, as
total credit decreased from 345,000 million Euros to 325,000 million Euros,
respectively. Moreover, these are another evidence of the harsh adjustments
being made by the Portuguese economy in the process of deleveraging and
structural reforms.
Since capital markets closed to Portuguese banks, these have relied mainly on
ECB funding, exponentially increasing their exposition to the ECB (Exhibit 10);
however, since the second half of 2012, banks have seen the risk of their debt
consecutively decreasing, in line with what had been happening with the
Portuguese public debt and have started to decrease their exposition to ECB
funding, as other financing alternatives appear. An example of that was that BES
issued a 3 year, 750 million Euros Bond, in October 2012, re-opening debt
markets for Portuguese banks. Moreover, we might witness, during 2013, more
Portuguese bank’s debt issues.
13
Conditions imposed to European banks
Exhibit 9: Total credit in the Portuguese Banking System
Source: Bank of Portugal
Source: Bank of Portugal
Exhibit 8: Loan-to-Deposits ratio in the
Portuguese Banking System
Source: Bank of Portugal
Exhibit 10: ECB funding of Portuguese
Banks
BANCO BPI, SA COMPANY REPORT
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Valuation of Banco BPI in Portugal
To value Banco BPI in the domestic market we developed two scenarios: the
scenario under which the expected macroeconomic variables materialize, which
we call “Base Scenario” and the scenario under which Portugal leaves the Euro-
Zone and returns to the old currency the Portuguese Escudo, which we call
“Exiting the Euro Scenario”. In our valuation we attribute a 5% probability of
Portugal leaving the Euro. When analyzing the possibility of Portugal leaving the
Euro we took into account two things: the yields on Portuguese government
bonds and a few studies/opinions related to the subject. The consistent decrease
in yields of Portuguese government bonds leads to think that the market is each
and each day attributing a lower probability of things going wrong in Portugal,
and consequently of leaving the Euro. In addition, several economists attributed
between 1% to 25% probability of Portugal leaving the Euro during the past 12
months, with Paul Krugman and Roubini amongst them. Moreover, along our
valuation report on BPI, we embraced a cautiously pessimistic view of the bank,
as the bank is struggling in a depressed economy full of problems. Thus, we
believe that 5% probability of Portugal leaving the Euro is adequate, when
looking at the current economic, political and social environments.
Base Scenario
The key assumption of the base scenario is that macroeconomic conditions will
follow the current expectations of the behavior of the economy in the years to
come. According to IMF’s latest economic report14
, the Portuguese economy will
only start growing in 2014, a very slow growth of 0.64%, followed by another
modest growth in 2015 and 2016 of 1.5% and 1.8% respectively. Regarding total
investment, it is forecasted to grow 3% in 2014, 9% in 2015 and 8% in 2016,
following a huge contraction in the period 2008-2013 of 42%; on the other hand,
gross national savings have increased 48% in the same period.
Regarding the bank’s activity we forecast a decrease in loans granted in 2013 of
4.7%, with corporate loans decreasing 5.6% and consumer loans decreasing
4.5%15
as both the investment and GDP reach the bottom of their values during
the 2008-2013 period, -42% for investment and -8% for cumulative GDP growth.
Only from 2014 onwards we forecast an increase in corporate and consumer
loans: corporate loans will increase 8% in 2014, 9.3% in 2015 and 11.3% in
2016, following the rise in investment, better economic prospects, the effect of
the structural reforms and as the government’s pro-economic and pro-investment
growth measures take action. Regarding consumer loans we also forecast
14
Source: International Monetary Fund, World Economic Outlook, April 2013. 15
We also forecast foreign loans to decrease 2.5% in 2013.
The Valuation of the Domestic Activity attributes a 5% probability of Portugal leaving the Euro. The consequences of such a scenario would be extremely severe to the shareholders of the bank.
BANCO BPI, SA COMPANY REPORT
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growth for the same period, with consumer loans increasing 8%, 8.4% and 9.3%
in 2014, 2015 and 2016 respectively.
Non-performing loans are still one of the most serious problems of the bank,
which is far from being solved. In 2012 loan impairments rose from € 135 million
in 2011 to € 254 million, this represents 0.91% of total loans. In 2013 we forecast
loan impairments to decrease to € 174 million, and further more in 2014 to € 156
million, € 153 million in 2015 and € 150 million in 2016. We believe that loan
impairments have reached their peak in 2012 as it was the hardest recession
during this three year period of recessions. In 2013 and 2014 we expect that loan
impairments decrease steadily as the economic conditions and corporate
financing conditions improve, letting companies finance their daily activities,
which have been almost impossible for a large number of companies in 2011 and
in 2012, leading to mass bankruptcy in the corporate sector.
In respect to deposits, we expect 2013 to be a year of slight growth of deposits,
only 3.5%. Deposits are subject to opposite forces, in one hand, the decline of
GDP and consequent decline in families’ income are putting pressure on
deposits, on the other hand, gross savings are increasing and the banking
system is looking to deposits as a way of financing, since financial markets are
still almost close for Portuguese banks. So, it is in these set of forces that
deposits are depending on, moreover, it is our prediction that the strong growth of
gross savings and the willingness to capture deposits will overcome the
downward pressure on deposits. In the years to come we forecast a steady
growth of deposits, 2.4%, 8% and 10% for 2014, 2015 and 2016 respectively.
It is extremely important to have an idea on what will be the interest rates
charged by the bank on loans and what will be the interest rates paid for deposits
when predicting a crucial source of revenue for the bank, the net interest income.
We begin by describing our forecast of future Euribor rates (Exhibit 11), which in
turn will be responsible for the determination of both interest rates on loans and
deposits. Our analysis was based on inflation expectations and expected GDP
growth in the euro-zone, which will be very modest, with inflation under 1.75%
from 2013 until 2016 and GDP slowly growing at an annual average of 1% until
2016, in this way, our forecasts for Euribor rates reflect the slow economic
recovery. Our analysis assume an Euribor 3 month of 0.3% in 2013, 0.75% in
2014, 1% in 2015 and 1.5% in 2016; an Euribor 6 month of 0.5% in 2013, 1% in
2014, 1.5% in 2014 and 2% in 2016 and an Euribor 12 month of 0.75% in 2013,
1.25% in 2014, 1.75% in 2015 and 2.25% in 2016.
As discussed before as one of the problems of the Portuguese banking system,
banks are facing huge difficulties as financing costs rose in the last three years
but many of the consumer long-term loans are contracted with extremely low and
Exhibit 11: Euribor Rates Forecasts
Source: NOVA ER Team
Non-performing loans will only decrease in the last quarter of this year or first quarter of the next year, when the economic activity is expected to start growing.
BANCO BPI, SA COMPANY REPORT
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even zero % spreads, crushing net interest margins, which in 2013 is expected to
be 0.83% in the domestic activity, slowly increasing in the years to come (Exhibit
12). On the contrary, in the case of the corporate loans, many of the debt is in
form of current accounts and short maturity loans, whose new contracts can be
changed must easier than those of consumer loans. As a consequence, banks
are demanding higher spreads to corporate loans, as it is the only alternative to
face the new financing costs, as most of the consumer loans are long-term and
impossible to change the contracted terms (e.g. Mortgage loans). In our valuation
we take this situation into account, where interest rates on consumer loans
increased slower than on corporate loans.
We forecast that in 2013 the domestic activity will have negative results of € 74
million, mostly penalized by reduced margins due to the rising costs of financing
and locked contracts on mortgage loans, with net interest income totalizing € 317
million. Fees and commissions will stay in line with previous years amounting to €
244 million. The main contributor to 2011’s negative results and 2012’s profit is
the activity developed by the capital markets division. In 2013 we also forecast
good results in this division as Portuguese government bonds held by the bank
keep appreciating and yields declining, we estimate a result of € 214 million. On
the bank’s expenses both administrative and staff costs and depreciations will
remain in line with previous years, representing altogether € 544 million. Total
impairments will decrease to € 347 million. The banking income will be € 775
million and total costs will sum € 891 million, leading to negative earnings before
taxes and minorities of € 116 million. The table 3, below, represents our
estimates for the domestic activity until 2016:
Banco BPI (Mn Euro) - Domestic Activity
Income Statement 2013F 2014F 2015F 2016F
Net Interest Income 317 426 473 560
Fees and Commissions 244 265 288 318
Capital Markets Results 214 224 242 267
Banking Income 775 914 1002 1145
Staff and Administrative costs 522 494 494 515
Depreciations 22 23 24 25
Provisions and Impairments 347 307 333 289
Operating costs 891 824 851 829
EBT -116 90 151 316
Taxes and Minorities -42 13 30 78
Net Income -74 77 121 238
Table 3 : Forecast of Domestic Activity Source: NOVA ER Team
Exhibit 12: Net Interest Margin in the
Domestic Activity
Source: NOVA ER Team
BANCO BPI, SA COMPANY REPORT
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Exiting the Euro Scenario
Some economists argue that the main problem of Portugal is the Euro for several
different reasons: First, the Euro is a strong and appreciated currency which
makes many of the Portuguese industry uncompetitive under the global
competition, partially because our industry adds low added value to its products,
making the cost of production an important variable to compete in foreign
markets. Secondly, with its own currency, Portugal would be able to expand
public consumption, which is in their view is essential to start the recovery of the
economy and stop the rising of unemployment. Other reasons are many times
presented in favor of leaving the Euro. Moreover, there is also the possibility of
Portugal being forced to leave the Euro, if the European Union decides not to
finance Portugal furthermore and if financial markets are closed to the country.
Although remote, there is the real possibility of this scenario to happen, which
would have a major impact in BPI, changing all our forecasts of the domestic
activity.
We assume that Portugal would leave the Euro in the near future, namely in
January 1st 2014 to facilitate. In that moment it is almost certain that deposits
would be converted to the returned Portuguese Escudo and frozen for at least a
few days to avoid bank runs, moreover, all domestic or foreign loans would be
converted to Escudos as well. The main problem for the bank would be the debt
issued in Euros in financial markets, which would probably stay denominated in
Euros, implying an increase identical to the devaluation of the Escudo.
When thinking of the macroeconomic conditions resulting from the exiting of the
euro, we looked carefully at the Argentinian example and its crisis of 1999-2002
and inferred the consequences on the Portuguese economy. We predict that
GDP will fall 10% in 2014, and then growth resumes at 4% in 2015 and 2016.
Total investment will fall by 25% in 2014 as response to the abrupt fall in GDP; it
will remain unchanged in 2015 and will grow 25% in 2016. As with what
happened in Argentina, inflation will soar to 15% in 2014, but then slowing to 8%
in 2015 and 5% in 2016. Unemployment rate will reach 25% according to our
forecasts, but then starts decreasing at 1.5 percentage points per year. In relation
to the exchange rate of the Euro/Escudo we believe that at the moment of the
conversion, by political decision the Escudo would return to its pre-Euro value,
which is 200.482 Escudos per Euro. However, we believe the Escudo would
devalue significantly in the next few days, with several studies pointing to
devaluations between 25%-50%; moreover, the Argentinian currency devalued
66% during the currency crisis. In our valuation we will assume a devaluation of
The internal discussion on whether Portugal should leave the Euro or not is not finished, as both sides recognize pros
and cons on either option.
Leaving the Euro would cost the reborn Portuguese Escudo a devaluation of cerca 40%.
BANCO BPI, SA COMPANY REPORT
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40%, implying an exchange rate moving from 200.482 Escudos per Euro to
283.65 Escudos per Euro.
Regarding the bank’s activity we forecast a decrease in loans granted of 9% to
the corporate sector and a reduction of 11% in the consumer loans, both in 2014,
with investment reduction and GDP negative growth clearly crushing any new
investment prospect. In 2015 and 2016 the situation improves clearly, as
investment and GDP start growing, with corporate loans increasing 4% in 2015
and 12.5% in 2016, consumer loans will increase 3% and 10% in 2015 and 2016
respectively. In respect to non-performing loans, we expect an exponential rise in
2014 to 15%, as what happened in Argentina in 2000 and 2001, due to the GDP
and investment shrunk, combined with unemployment rise, which directly affects
non-performing loans, but also the instability caused by the change of currency
and devaluation process. In the following years we expect this number to come
down to 5% in 2015 and 3% in 2016, as a better macroeconomic environment
and the regain competitiveness of the economy starts generating employment
and investment growth.
Like in Argentina during the crisis and even more recently in Cyprus, bank
deposits will be frozen for at least a few days in order to avoid bank runs.
Moreover, all deposits will be converted to Escudos and depositors will suffer the
devaluation in their savings. Although being frozen, we forecast a decline of 4%
in deposits in 2014, as a result of the instability created by the change of
currency and the fact that some agents moved part of their savings to other
products, namely gold or foreign investments. In 2015 and 2016 we forecast
growth of deposits of 5% and 11% respectively, as the economic conditions
improve and the money returns to the traditional deposits.
In 2014 and 2015 the bank will have heavy negative results, resulting mainly from
impairments, which will amount to € 2500 million in 2014, six times the 2013
impairments value and € 600 million in 2015. Net income will be negative by the
amount of € 1,900 million in 2014 and € 250 million in 2015, however 2016 will be
the recovery year, with net income rebounding to € 106 million. The bank will
need a capital increase in 2014 to face the large loss of that same year, as past
reserves are crushed by the exponential rise of impairments, leaving total equity
negative. We forecast a capital increase of no less than € 2,000 million, to face
the 2014 loss and provide the bank the liquidity it needs to face the year of 2015
with some capital buffer. If the capital increase succeeds, total equity will soon be
at pre-crisis levels, € 1,000 million in 2015 and € 1,400 million in 2016. The
forecasts for the Domestic activity under the scenario of “Exiting the Euro” are
presented in the table 4 and 5 below:
BANCO BPI, SA COMPANY REPORT
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Banco BPI (Mn Euro and Mn Portuguese Escudo) – Domestic Activity
Income Statement 2013F 2014F 2015F 2016F
Net Interest Income 329 -7.754 88.023 111.447
Fees and Commissions 271 64.504 74.125 83.576
Capital Markets Results 223 49.161 60.048 85.267
Banking Income 823 105.911 222.196 280.290
Staff and Administrative costs 543 123.958 123.400 129.768
Depreciations 22 5.090 5.141 5.887
Provisions and Impairments 380 706.138 193.913 104.123
Operating costs 946 835.187 322.454 239.779
EBT -122 -729.276 -100.258 40.511
Taxes and Minorities -44 -185.474 -28.283 8.401
Net Income -74 -543.801 -71.975 32.110
Table 4 : Forecast of Domestic Activity Source: NOVA ER Team
Banco BPI (Mn Euro) – Domestic Activity
Income Statement 2013F 2014F 2015F 2016F
Net Interest Income 329 -27 314 368 Fees and Commissions 271 227 265 276 Capital Markets Results 223 173 214 282 Banking Income 823 373 793 927 Staff and Administrative costs 543 437 441 429 Depreciations 22 18 18 19 Provisions and Impairments 380 2.489 692 344 Operating costs 946 2.944 1.151 793 EBT -122 -2.571 -358 134 Taxes and Minorities -44 -654 -101 28 Net Income -74 -1.917 -257 106
Table 5 : Forecast of Domestic Activity Source: NOVA ER Team
The repayment of the CoCos
Before entering in detail on the schedule of repayment of the CoCos by BPI, we
will briefly describe the origin of these convertible bonds. All Portuguese banks
had to comply with a Core Tier I ratio of 10% by final year 2012; however, BPI
was below it (9.2% in final year 2011) and in June of 2012 BPI issued “contingent
convertible subordinated bonds” (CoCos) totally subscribed by the Portuguese
Republic which are eligible for Core Tier I purposes and allowed BPI to reach a
BANCO BPI, SA COMPANY REPORT
PAGE 20/37
Core Tier I ratio of 15%. These CoCos amounted to € 1,500 million at the issue
date, but BPI repaid immediately € 200 million16
and more recently three other
repayments of € 100 million, € 200 million and € 100 million respectively, leaving
nowadays € 900 million outstanding of the convertible bonds. During the period
of the convertible bonds (5 years) BPI has to pay increasing interests to the
State, 8.5%, 8.75%, 9%, 9.5% and 10% per year respectively. If the loan is not
fully repaid at the due date, the amount outstanding will convert to capital, diluting
every other shareholder. The board of directors of BPI wants to repay the CoCos
as soon as possible, to avoid partial nationalization; however it is not an easy
task under the current economic environment.
Hereinafter we will describe the possible repayment schedule of the CoCos by
BPI according to our estimates. We assume that BPI in Portugal will repay the
CoCos on its own, without touching Angola’s or Mozambique’s subsidiary’s
results. In this way we get a better perception on how difficult it is for the
domestic activity of the bank to face the current macroeconomic conditions and
what is the true value of the domestic activity on its own; without misleading the
final price target calculation, as the foreign activity is compensating for lower
domestic returns.
In the base scenario, we assume that the amount outstanding of CoCos in final
year 2013 is € 900 million, as we forecast a negative net income for that year, not
allowing for further repayments. In 2014 we forecast a net income of € 77 million
which by law decree must be fully allocated to the repayment of CoCos, as the
decree states that during the period of the loan, while there is still an amount to
be repaid to the State, the banks are not allowed to distribute dividends. In this
way in final year 2014 the CoCos outstanding are still worth € 823 million. In
2015 the net income is expected to be € 121 million, reducing the CoCos to €
702 million. In 2016, the domestic activity will have positive results of € 238
million, implying a reduction in CoCos to € 464 million by final year 2016. As the
CoCos must be fully repaid after five years of the issue date, June 2017, we
believe the bank will have to raise capital somewhere in the second semester of
2016 to make sure it fully repays the State’s loan by the due date. We estimate
that capital increase operation to aim towards a € 450 - € 500 million new capital
target, assuring the full repayment of the CoCos, and avoiding partial
nationalization. The detailed repayment schedule can be seen in the exhibit 13
below:
16
The € 200 million were raised through a capital increase in August 2012.
BANCO BPI, SA COMPANY REPORT
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Under the leaving the Euro scenario, the repayment is much more difficult for
BPI, as the bank suffers huge losses in 2013, 2014 and 2015, but particularly in
2014. Until 2015 the remaining € 900 million worth in CoCos will remain
unchanged, as the bank is struggling to finance its equity, setting aside the
CoCOs matter for a while. However in 2016 the bank will already be able to
repay part of the loan, € 106 million, leaving € 794 million to be repaid. As we
analyzed before, under this scenario, we already forecast a capital increase of €
2,000 million in 2014, but in 2016 we see no other alternative but to raise capital
again to repay the remaining CoCos in the amount of € 738 million17
. The
detailed repayment schedule can be seen in exhibit 14 below:
17
It is € 738 million instead of € 794 million due to the new exchange rate of 302.48 Escudos per Euro.
BANCO BPI, SA COMPANY REPORT
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Angola
Angola has become a fast-growing economy since the end of its civil-war in
2002. Prior to that, 26 years of civil-war following the Independence from
Portugal led to a significant destruction of the public infrastructure, as well as
economic enterprises. Since 2002 the Angolan economy grew at an average
annual rate of more than 11%, turning Angola into one of the fastest growing
countries in the world. Moreover, the economic growth is expected to keep its
strong momentum, with real GDP expected to rise at an average annual rate of
6% from 2013 until 2018, investment rising at an average annual rate of 6% and
inflation at 8% per annum for the same period18
. Although Angola is growing
impressively, it is still a poor country, with a huge required transformation still
ahead. It has been only a decade since the country started to rebuild roads,
schools, hospitals, public sanitation, etc. The Angolan GDP is much dependent of
the oil sector, which represents 47% of the product, followed by 30% of non-
transacted services, 10% agriculture and only 6% of non-oil industry. According
to independent oil-experts Angola, with its recent oil discoveries, might have
significant production for the next 50 years, reaching the production of 2 million
barrels per day in 2014. Agriculture will also be an important sector in the near
future, completely abandoned, of all agricultural area only 6% is now explored,
when explored can make Angola one of the main agricultural powers in Africa.
Communications and construction also play an important role in the Angolan
economy, and will remain important as the country keeps rebuilding itself after
the long and devastating civil-war.
The competition in the banking sector has allowed a growing access of the
population to the Angolan banking system in the country, as the major banks
seek to be present in the 18 domestic provinces. Moreover, we developed a
study in which we forecast the Angolan population access to the banking system
until 2017. According to our study population access to banks in Angola will
increase from 34% in 2013 to 70% in 2017, which will represent 16 million
persons with access to banking services (Exhibit 15). The increase in access of
banks, by the Angolan population will increase at an annual average rate of 31%
per year (Exhibit 16). This study gives us an indication of the potential of the
Angolan market for banks, as it is a country in fast development.
Banco de Fomento Angola (BFA) is the Angolan subsidiary of BPI. Angola is a
country with significant ties to Portugal by historical reasons; both countries share
the same language, a huge presence of Portuguese companies are currently
working in Angola, trade and residence authorization agreements make possible
18
Source: International Monetary Fund, World Economic Outlook, April 2013.
Exhibit 15: Population access to
banks in Angola
Source: NOVA ER Team
Exhibit 15: Population access to banks in Angola
Source: NOVA ER Team
BANCO BPI, SA COMPANY REPORT
PAGE 23/37
the significant trade made between the two countries and the large community of
Portuguese citizens living in Angola and vice-versa, so it was an obvious
geography for BPI to expand its foreign operations. BFA is currently the fourth
bank in Angola by assets, having a market share in deposits of 16.4% and
leadership positions in the ATM’s and APT’s segment. The bank has 158
branches and more than 2000 employees.
Scenarios for BFA in Angola
Angola is a promising country, which lately has been focused in rebuilding its
infrastructure and developing the living conditions of its population, mainly with
the income generated by the oil industry. Angola has become an important oil
exporter, selling more than 2 million barrels a day, but also extremely dependent
on oil prices. One of the important issues that will influence the Angolan economy
prospects in the future is the possible discovery of new wells and the oil price.
Another important question is the succession of the current President, José
Eduardo dos Santos, who rules Angola since 1979. Nowadays his authority is
recognized and respected by everyone, i.e. military officials and other members
of the Angolan elite; however, if the Angolan succession is not prepared while
José Eduardo dos Santos is still alive, to assure a quiet and peaceful succession,
and for some reason José Eduardo dos Santos dies in the meanwhile, there
might be a huge problem in the succession of the country, as the military elite
fight amongst themselves to succeed the current president, possibly leading the
country to another civil-war.
In the case of the valuation of the Angolan subsidiary, as for the Mozambique’s
subsidiary, we built four different scenarios: a bad, a disappointing, a normal
and a good scenarios. The valuation of the different scenarios can be seen in the
Valuation Summary section, on page 29.
The bad scenario (1) reflects precisely the possibility of a succession problem in
Angola, with the country facing huge instability and possibly a civil-war of two to
three years, resulting both in a new leadership and new elite in the country. This
scenario is obviously the worst scenario for BFA, as the macroeconomic
conditions resulting from a civil-war are devastating and issues relating to credit
defaults and the recognition of impairments. Under such a scenario we forecast
at the macroeconomic level a decrease in GDP of 10% in 2014 and a reduction
of 5% in 2015; as for investment we forecast a reduction of 25% in 2014 and in
2015. Regarding the exchange rate, we forecast a devaluation of 50% in the
Kwanza, which in 2013 traded at 136 Kwanzas per Euro, passing to 217
Kwanzas per Euro in 2014. As for the bank’s activity, we forecast credit
impairments to rise significantly, as non-performing loans rise to 20% in 2014,
BANCO BPI, SA COMPANY REPORT
PAGE 24/37
and 15% for 2015 and 2016. Government bonds will suffer a haircut of 60% in
2014 and 20% in 2015, resulting in more impairments, which will deeply penalize
the bank’s results. Total loans decrease 15% in 2014 and in 2015, suffering from
the decrease in investment and the closure of some business. As of customers’
deposits we forecast a 25% reduction in 2014, followed by 2% rise in the
following years, resulting from money withdraws as a protective measure taken
by individuals and companies who have money in the bank. Moreover, this
situation is dependent on possible restrictive measures taken by the National
Bank of Angola, not allowing money withdraws, however in the case of a situation
like this it is highly probable that the elites will take their money out of the country
in the days before the decision by the National Bank is made.
The bank’s results will be extremely negative in 2014 and in 2015: -
123,000,000,000 Kwanzas in 2014 and –20,000,000,000 Kwanzas in 2015, with
2016 being slightly positive. Defaults on loans and government bonds are the
main cause of these results, with impairments in 2014 being over
200,000,000,000 Kwanzas, compared to 4,638,000,000 Kwanzas in 2013. The
main source of revenue of the bank, net interest income, will decrease 48% to
14,023,000,000 Kwanzas in 2014 and further 34% in 2015. BFA’s equity is
completely evaporated in 2014, imposing an emergency capital increase of, at
least, 200,000,000,000 Kwanzas or over 900,000,000 Euros at the new
exchange rate of 218 Kwanzas per Euro.
The disappointing scenario (2) is a scenario which represents the activity of the
bank in the case of a deterioration in the macroeconomic conditions, namely a
decrease in the GDP growth prospects and lower investment than the predicted,
i.e. a general macroeconomic slowdown. This situation can result from a
permanent decrease in the price of oil in the global markets which deeply affects
the Angolan economy, highly dependent on oil production and exports. A
permanent decrease in oil prices is not completely irrational, as alternative
energy sources appear, namely the Shale Gas in the United States, possibly
leading to a new wave of cheap energy as happen with oil from the end of the
second world war until the oil shocks of the seventies.
Under this scenario, we predict the macroeconomic variables to perform
relatively bad when compared to the actual expectations: the GDP will grow only
at 2% per year from 2014 to 2016, and investment will decline 10% in 2014, 5%
in 2015 and will be unchanged in 2016. The bank will be directly affected by an
increase in underperforming loans to 8% during these years, with credit
increasing only 3%, 5% and 7% in 2014, 2015 and 2016 respectively. Customer
Deposits will increase at 5% per year. Under this scenario the return on equity is
BANCO BPI, SA COMPANY REPORT
PAGE 25/37
still quite impressive, 25% per year since 2014 until 2016, however far below the
36% return on equity from 2008 until 2013.
The normal scenario (3) is the scenario under which all IMF expectations over
the Angolan economy materialize: GDP will grow at 7% from 2014 until 2016,
investment will decline 3% in 2014 and then will grow 3% in 2015 and in 2016.
The bank is expected to have good results under this scenario, the most likely
one, as the return on equity will be 31% per year from 2014 until 2016, however
the bank is strongly capitalized, with 20% of its net income going to reserves. In
the normal scenario loan impairments will be 5.78% per year throughout the
period of analysis, maintaining the average of the past periods which had similar
macroeconomic conditions. Credit loans will grow at an annual average rate of
21% from 2014 until 2016, with customer deposits rising 8% per year in the same
period; significantly lower than the growth rate of loans, as the bank is trying to
increase its loan-to-deposit ratio, which is 25% in 2013, which in turn will improve
the net interest margin.
The good scenario (4) is dependent on the same variable as the disappointing
scenario, oil. In this case, the good scenario happens in the case of a permanent
rise in the price of oil or in the case of significant new oil wells discoveries in
Angola, increasing the production of oil permanently. The macroeconomic
environment will generally improve as GDP grows faster and investment rising.
We forecast GDP to rise 9% per year from 2014 until 2016 and investment rising
3% in 2014 and 8% in 2015 and 2016. Under this scenario non-performing loans
will rise to 5.78% with loans rising 28% in 2014 and in 2015. Customer deposits
will grow 9% per year from 2013 until 2016. Return on equity will be 31% per
year, below the average of 36% from 2008 until 2013; however the bank is
strongly capitalized, as in the case of the normal scenario.
BANCO BPI, SA COMPANY REPORT
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Mozambique
Mozambique has lately turned into a fast-growing economy, with real GDP
expected to rise at an average annual rate of 8% from 2013 until 2018,
investment growing at an average annual rate of 12% and inflation below 6% for
the same period19
. Besides the impressive Macroeconomic projections,
Mozambique is still a very poor country, listed 165 in the World Bank´s Human
Development Index, with 31% of GDP coming from agriculture and fishery,
employing 77% of the labor force, with only 8% employed in Industry and 15% in
services. The Mozambique’s economy is expected to suffer huge transformations
in the next few years, as the Natural Gas and Coal explorations develop, turning
the country into an important exporter of such raw materials. The development of
further important industries such as cement, furniture, food and beverages will
also be important in the diversification of the country’s exports. The development
of the industry sector will require better communication routes, namely through
the construction of roads, railways, ports and airports; moreover the investment
on renewable energy will force the construction of new dams providing larger
energy independence of the country. The development of tourism is also a
strategic objective that the government is willing to focus on.
Banco Comercial e de Investimentos (BCI) is the Mozambique’s subsidiary of
BPI. Mozambique is a natural geography for BPI to develop its foreign activity as
the country has tight relations with Portugal, namely sharing the same language,
having bilateral trade agreements, innumerous Portuguese companies are
operating in Mozambique and a large share of Portuguese citizens are living in
Mozambique and vice-versa. BCI is the second largest bank operating in
Mozambique by banking revenue, with a market share of 30.22% in loans and
29.18% in deposits, serving over 550.000 clients and 128 branches across the
country20
.
Scenarios for BCI in Mozambique
Although Mozambique is in the pace of modernization and stabilization of its
economy, it is still a developing country, subject to a large number of factors that
might change the macroeconomic environment and affect the activity of BCI,
such as: Political and social unrest due to poor living conditions, leading to a
decrease in GDP, investment and rise of inflation; or the Discovery of new natural
Gas wells and consequent rise in GDP growth and investment. The last two
scenarios are extreme and opposite, but possible for Mozambique in the near
19
Source: International Monetary Fund, World Economic Outlook, April 2013 20
Source: BCI’s annual report, 2012
BANCO BPI, SA COMPANY REPORT
PAGE 27/37
future, and as so, we must account for it in our BCI’s projections. In this way, we
analyzed and took into account in the valuation of BCI four different scenarios,
with different probabilities, depending on the characteristics of each of the
scenarios. We built projections for the bank’s activity under each of the scenarios
and then computed the expected FCFE weighting the different scenarios. We
constructed a bad, a disappointing, a normal and a good scenarios. The
valuation of the different scenarios can be seen in the Valuation Summary
section, on page 29.
The bad scenario (1) reflects the remote but existing possibility of a political or
social unrest, leading to a change of government and possibly of regime,
implying huge instability in the country. In this scenario, we foresee a tremendous
impact at the macroeconomic level, with a reduction in GDP of 10% for 2014, 5%
in 2015 and 0% GDP growth in 2016; for investment we forecast a reduction of
25% in 2014 and 2015 and 0% in 2016, and finally a very important variable the
exchange rate; which we assume to devalue 50%, from 42 Metical per Euro in
2013 to 66 Metical per Euro in 2014, something common in events such as
revolutions and very unstable periods. At the bank’s level, the situation can be
more or less severe depending on the measures taken by the new government,
regarding the freezing of deposits and the payment of Government Bonds.
Moreover we forecast an 80% haircut in Government Bonds in 2014, and another
20% in 2015, implying huge impairments to be recognized by the bank.
Regarding the Loans portfolio, we forecast a great rise in general credit defaults,
10% in 2014 and 5% in 2015; and also a decrease in loans granted of 15% in
2014 and 2015; as the instability in the country freezes any new investments, and
the severe recession will imply several defaults. As for deposits, the policy
adopted by the Central Bank will be crucial in terms of freezing deposits for some
days, in order to avoid bank runs; however we introduced a partial deposit’s run
of 20% in 2014, as a response to the instability, followed by 0% and 4% growth in
2015 and 2016 respectively, as confidence returns.
The consequence of these predictions in the bank’s balance sheet and income
statement is that the bank will have extremely negative results in 2014 and 2015,
with only 2016 being the recovery year. In 2014 we predict more than
9,000,000,000 AOA of impairments, resulting from defaults on both credit loans
and Government Bonds, comparing to 350,000,000 AOA in 2013. Net Interest
Income will suffer a large reduction, which, combined with impairments, cause a
negative Net Income of more than 7,000,000,000 AOA in 2014 and
1,600,000,000 in 2015. In 2014, as a result of the huge amount of impairments,
we believe that BCI will need a capital inflow of 10,000,000,000 AOA in form of
share capital, in order to prevent Equity of being negative.
BANCO BPI, SA COMPANY REPORT
PAGE 28/37
The disappointing scenario (2) reflects the possibility of a decrease in the
expected GDP growth and investment growth resulting from a deceleration of the
global and regional economies, with less demand for Mozambique’s exports and
also internal factors that might decrease the economic prospects. In this scenario
we foresee at the macroeconomic level a GDP growth of 2% throughout 2014,
205 and 2016; for investment we forecast a 20% growth in 2014 followed by 0%
growth in 2015 and -5% in 2016. At the bank’s level, we forecast a rise in credit
defaults to 4% in 2014 and 3% in 2015 and in 2016. The credit loans evolution
will be less optimistic than what the “normal scenario” expects, with loans
increasing 30% in 2014 and 10% in 2015 and 2016. As for deposits, we forecast
an increase of 12% per year. In this scenario no share capital increase is
necessary, however the return on equity is lower than in previous years, 16% in
2014 and in 2015 and 24% in 2016, comparing to an average of 25% from 2008
until 2013.
The normal scenario (3) reflects the possibility of maintenance of the expected
GDP and investment growth rates as forecasted by the IMF in its world economic
outlook: GDP growth of 8% from 2014 until 2016 with investment growing 54% in
2014, 5% in 2015 and -1% in 2016. In this case, at the bank’s level, we forecast
loan impairments to follow the past years behavior, around 2.72% per year.
Regarding credit loans we forecast growth rates of 50% in 2013, 20% in 2015
and 14% in 2016, reflecting the high investment expected to occur in the country
and great GDP growth prospects. Customer deposits will grow around 20% along
the years of 2014, 2015 and 2016, giving the bank a loan-to-deposit ratio of 95%
in those same years. In this scenario the bank will be capable of delivering high
returns to its investors, 26% return on equity from 2013 until 2016.
The good scenario (4) reflects the possibility of an increase in the expected
GDP and investment growth rates, as a result of more Natural Gas wells
discovered and further momentum on the Mozambique’s economy as well as
better economic conditions in the region. With the discovery of more Natural Gas
it is expected to have a positive contagious effect on the overall economy,
boosting investment and the growth of GDP. As so, in this scenario, we forecast
at the macroeconomic level a GDP growth of 10% for 2014, 2015 and 2016; as
for investment we forecast a rise of 60% in 2014, 20% in 2015 and 10% in 2016.
At the bank’s level, we forecast a decrease in credit defaults to 2% in 2014 and
2015 and 2016; an increase in loans granted of 50% in 2014, 20% in 2015 and
14% in 2016. Regarding the customer deposits we forecast a growth rate of 20%
for the years of 2014, 2015 and 2016, increasing the loan-to-deposit ratio of the
bank to 101%. Under this scenario the bank will be able to provide a return on
equity of more than 28%, achieving 31% in 2015 and 2016.
BANCO BPI, SA COMPANY REPORT
PAGE 29/37
BANCO BPI, SA COMPANY REPORT
PAGE 30/37
Valuation Summary
Portugal – Banco BPI
FCFE description by Scenario and Aggregated FCFE
Base Scenario 2013F 2014F 2015F 2016F Terminal
Net Income -74 77 121 238 2426
Retained Earnings 0 77 121 702 485
FCFE -74 0 0 -464 1941
Exit of the Euro Scenario (Euros) 2013F 2014F 2015F 2016F Terminal
Net Income -74 -1917 -257 106 1083
Retained Earnings 0 2000 0 106 1063
FCFE -3917 -257 0 21
FCFE 2013F 2014F 2015F 2016F Terminal
Base Scenario -74 0 0 -464 1941
Exit of the Euro Scenario (Euros) -74 -3917 -257 0 21
Euros 2013F 2014F 2015F 2016F Terminal
Aggregated FCFE -74 -196 -13 -441 1845 Discounted FCFE -66 -156 -9 -281 1177
Table 6 : Domestic Valuation Source: NOVA ER Team
Present Value of BPI’s domestic activity
PV 664.369.228 € Nº Shares 1.390.000.000 Price per share 0,48
Table 7 : Price Target Source: NOVA ER Team
BANCO BPI, SA COMPANY REPORT
PAGE 31/37
Angola – Banco de Fomento Angola
Banco de Fomento Angola – FCFE description by Scenario and Aggregated FCFE
FCFE in Kwanzas 2013F 2014F 2015F 2016F Terminal Probability of Scenario
Scenario 1 FCFE 19.137 -322.799 -19.573 4.510 58.990 20%
Scenario 2 FCFE 18.803 16.822 15.912 16.814 276.505 25%
Scenario 3 FCFE 19.572 21.047 22.674 26.270 437.342 40%
Scenario 4 FCFE 19.765 21.736 23.795 28.106 472.685 15%
Exchange Rates EUR/AOA 2013F 2014F 2015F 2016F
Scenario 1 136,69 217,77 226,29 235,46
Scenario 2 136,69 139,88 142,60 145,58
Scenario 3 136,69 145,18 150,86 156,97
Scenario 4 136,69 150,59 159,43 169,02
FCFE in Euros 2013F 2014F 2015F 2016F Terminal
Scenario 1 140 -1482 -86 19 251
Scenario 2 138 120 112 115 1899
Scenario 3 143 145 150 167 2786
Scenario 4 145 144 149 166 2797
Euros 2013F 2014F 2015F 2016F Terminal
Aggregated FCFE 141 -187 93 125 2059
Discounted FCFE 130 -159 73 90 1485
Table 8 : Angolan Subsidiary Valuation Source: NOVA ER Team
Present Value of Banco de Fomento Angola
PV 1.619.355.236 €
Nº Shares 1.305.561.000
Price per share 1,24 €
Price per share (BPI = 50,08%) 0,62 €
Table 9 : Price Target Source: NOVA ER Team
BANCO BPI, SA COMPANY REPORT
PAGE 32/37
Mozambique – Banco Comercial e de Investimentos
Banco Comercial e de Investimentos – FCFE description by Scenario and Aggregated FCFE
FCFE in Meticais 2013F 2014F 2015F 2016F Terminal Probability of Scenario
Scenario 1 FCFE 894 -17256 -1670 0 701 20%
Scenario 2 FCFE 690 556 600 1151 13756 25%
Scenario 3 FCFE 690 1297 1465 1532 18584 40%
Scenario 4 FCFE 666 1352 1698 2007 24644 15%
Exchange Rates EUR/MZN 2013F 2014F 2015F 2016F
Scenario 1 42,18 66,13 68,52 71,03
Scenario 2 42,18 42,43 43,13 43,87
Scenario 3 42,18 44,09 45,68 47,36
Scenario 4 42,18 45,77 48,32 51,05
FCFE in Euros 2013F 2014F 2015F 2016F Terminal
Scenario 1 21 -261 -24 0 10
Scenario 2 16 13 14 26 314
Scenario 3 16 29 32 32 392
Scenario 4 16 30 35 39 483
Euros 2013F 2014F 2015F 2016F Terminal
Aggregated FCFE 17 -33 17 25 310
Discounted FCFE 16 -27 12 17 208
Table 10 : Mozambique’s Subsidiary Valuation Source: NOVA ER Team
Present Value of Banco Comercial e de Investimentos
PV 226.213.322 € Nº Shares 300.000.000 Price per share 0,75 € Price per share (BPI = 30%) 0,23 €
Table 11 : Price Target Source: NOVA ER Team
BANCO BPI, SA COMPANY REPORT
PAGE 33/37
Price Target Final year 2013 – Sum of the Parts
Banco BPI, SA Consolidated - Sum of the Parts
Price per Share in Euros
Banco BPI - Portugal 0,48 €
BFA - Angola 0,62 €
BCI - Mozambique 0,23 €
Price target
Banco BPI, SA 1,33 €
Table 12 : Price Target Source: NOVA ER Team
BANCO BPI, SA COMPANY REPORT
PAGE 34/37
Appendix
Consolidated Banco BPI (Mn Euro)
Income Statement Forecast 2013F 2014F 2015F 2016F
Net Interest Income 581 710 768 886
Fees and Commissions 293 323 356 397
Capital Markets Results 379 409 452 504
Banking Income 1.254 1.442 1.576 1.788
Staff and Administrative costs 720 715 741 784
Depreciations 44 47 53 59
Provisions and Impairments 389 356 389 355
Operating costs 1.152 1.118 1.183 1.198
EBT 101 324 393 590
Taxes and Minorities 96 156 175 241
Net Income 5 169 218 349
Consolidated Banco BPI (Mn Euro)
Balance Sheet Forecast 2013F 2014F 2015F 2016F
Assets
Cash and Deposits 1.839 1.951 2.189 2.537
Interbank Deposits and Investments 7.429 6.158 2.707 2.456
Bonds and Other Securities 10.873 11.527 10.333 11.293
Loans 26.800 29.168 32.123 35.557
Fixed Assets 333 373 428 492
Other Assets 1.284 1.369 1.478 1.623
Total Assets 48.558 50.546 49.257 53.496
Liabilities
Owed to Credit Institutions 3.152 3.157 3.163 3.169
Customer Deposits 24.815 26.517 29.471 32.034
Provisions 2.361 2.292 2.511 2.796
Other Liabilities 10.428 10.729 11.317 12.365
Total Liabilities 40.756 42.694 46.461 50.363
Equity
Share Capital 1.190 1.190 1.190 1.654
Reserves and Retained Earnings 565 707 862 1.049
Net Income 5 169 218 349
Minority Interests 536 526 525 545
Total Equity 2.296 2.592 2.796 3.133
Total Equity + Liabilities 43.052 45.286 49.257 53.496
BANCO BPI, SA COMPANY REPORT
PAGE 35/37
Banco Fomento Angola (Mn AOA (Kwanza))
Income Statement 2013F 2014F 2015F 2016F
Net Interest Income 26.961 28.554 30.007 35.872
Fees and Commissions 3.625 4.167 5.106 6.305
Capital Markets Results 18.051 21.074 24.592 28.787
Banking Income 48.638 53.796 59.704 70.963
Staff and Administrative costs 16.698 19.494 22.747 26.628
Depreciations 1.713 1.978 2.287 2.646
Provisions and Impairments 4.638 5.365 6.520 7.970
Operating costs 23.048 26.837 31.555 37.244
EBT 25.590 26.959 28.149 33.719
Taxes and Minorities 1.697 1.731 1.635 2.760
Net Income 23.892 25.227 26.514 30.959
Banco Fomento Angola (Mn AOA (Kwanza))
Balance Sheet 2013F 2014F 2015F 2016F
Assets
Cash and Deposits 141.697 167.681 198.006 233.157
Interbank Deposits and Investments 254.835 307.771 357.402 417.330
Bonds and Other Securities 293.537 333.959 379.993 432.424
Loans 185.503 214.598 260.817 318.815
Fixed Assets 19.037 21.980 25.416 29.401
Other Assets 7.960 7.732 7.944 8.204
Total Assets 902.569 1.053.721 1.229.577 1.439.331
Liabilities
Owed to Credit Institutions 4.390 4.709 5.040 5.376
Customer Deposits 780.902 923.001 1.088.709 1.280.529
Provisions 14.785 20.150 26.670 34.641
Other Liabilities 9.619 10.317 11.041 11.778
Total Liabilities 809.696 958.177 1.131.460 1.332.324
Equity
Share Capital 3.522 3.522 3.522 3.522
Reserves and Retained Earnings 65.460 66.794 68.081 72.526
Net Income 23.892 25.227 26.514 30.959
Total Equity 92.874 95.544 98.117 107.007
Total Equity + Liabilities 902.569 1.053.721 1.229.577 1.439.331
BANCO BPI, SA COMPANY REPORT
PAGE 36/37
Banco Comercial e de Investimentos (Mn MZN (Metical))
Income Statement 2013F 2014F 2015F 2016F
Net Interest Income 2.803 3.858 4.422 4.613
Fees and Commissions 960 1.323 1.592 1.840
Capital Markets Results 1.406 1.760 2.138 2.574
Banking Income 5.169 6.942 8.152 9.027
Staff and Administrative costs 3.194 3.803 4.382 4.705
Depreciations 369 480 624 811
Provisions and Impairments 354 512 612 693
Operating costs 3.917 4.795 5.619 6.210
EBT 1.252 2.146 2.533 2.817
Taxes and Minorities 200 343 405 451
Net Income 1.052 1.803 2.128 2.366
Banco Comercial e de Investimentos (Mn MZN (Metical))
Balance Sheet 2013F 2014F 2015F 2016F
Assets
Cash and Deposits 7.693 7.431 10.096 16.943
Interbank Deposits and Investments 7.578 1.261 2.784 5.779
Bonds and Other Securities 6.746 8.826 9.384 9.705
Loans 50.885 73.628 88.044 99.729
Fixed Assets 4.408 5.730 7.449 9.683
Other Assets 584 638 684 730
Total Assets 77.894 97.513 118.441 142.569
Liabilities
Owed to Credit Institutions 5.069 5.475 5.913 6.376
Customer Deposits 62.553 77.253 94.901 115.885
Provisions 272 393 470 533
Other Liabilities 3.992 5.830 6.143 6.156
Total Liabilities 71.886 88.951 107.427 128.949
Equity
Share Capital 3.000 3.000 3.000 3.000
Reserves and Retained Earnings 1.956 3.759 5.887 8.253
Net Income 1.052 1.803 2.128 2.366
Total Equity 6.008 8.562 11.014 13.620
Total Equity + Liabilities 77.894 97.513 118.441 142.569
BANCO BPI, SA COMPANY REPORT
PAGE 37/37
Disclosures and Disclaimer
Research Recommendations
Buy Expected total return (including dividends) of more than 15% over a 12-month period.
Hold Expected total return (including dividends) between 0% and 15% over a 12-month period.
Sell Expected negative total return (including dividends) over a 12-month period.
This report was prepared by Francisco da Silva Carrilho Duarte Lopes, a student of the NOVA School of Business and Economics, following the Masters in Finance Equity Research – Field Lab Work Project, exclusively for academic purposes. Thus, the author, which is a Masters in Finance student, is the sole responsible for the information and estimates contained herein and for the opinions expressed, which reflect exclusively his/her own personal judgement. This report was supervised by professor Rosário André (registered with Comissão do Mercado de Valores Mobiliários as financial analyst) who revised the valuation methodology and the financial model. All opinions and estimates are subject to change without notice. NOVA SBE or its faculty accepts no responsibility whatsoever for the content of this report nor for any consequences of its use. The information contained herein has been compiled by students from public sources believed to be reliable, but NOVA SBE or the students make no representation that it is accurate or complete, and accept no liability whatsoever for any direct or indirect loss resulting from the use of this report or its content. The author hereby certifies that the views expressed in this report accurately reflect his/her personal opinion about the subject company and its securities. He/she has not received or been promised any direct or indirect compensation for expressing the opinions or recommendation included in this report. The author of this report may have a position, or otherwise be interested, in transactions in securities which are directly or indirectly the subject of this report. NOVA SBE may have received compensation from the subject company during the last 12 months related to its fund raising program. Nevertheless, no compensation eventually received by NOVA SBE is in any way related to or dependent on the opinions expressed in this report. The Nova School of Business and Economics, though registered with Comissão do Mercado de Valores Mobiliários, does not deal for or otherwise offers any investment or intermediation services to market counterparties, private or intermediate customers. This report may not be reproduced, distributed or published without the explicit previous consent of its author, unless when used by NOVA SBE for academic purposes only. At any time, NOVA SBE may decide to suspend this report reproduction or distribution without further notice.