On the TOP101 methodology and value of banks

Sulev Raik

Prudentia Tallinn, Partner

It gives me great pleasure to tell you that we did not have to make any changes to the TOP101 methodology this year. Keeping things as they are would be ideal, but, of course, we are always open to discussion on the methodology and how to improve the ranking quality.

Having said that, there is one technical aspect I would like to mention alshough it is not directly related to our methodology. Namely, this time we decided to exclude Russian companies from the comparison groups of EV/EBITDA multiples, as the market value of Russian companies may be distorted due to sanctions and the isolation of Russian financial markets. The impact of this decision is insignificant, as Russian companies account for a small proportion of the total number of listed companies in Europe.

Another aspect is that in this year's TOP101 we have separated Enefit Green from Eesti Energia and calculated them separately. Since Enefit Green is now a listed company, we decided to include it separately from its parent company Eesti Energia. This in turn caused the value of Eesti Energia, the winner of last year's TOP101, to decline compared to last year.

It was last year when we decided that in case of listed companies, we would take their stock price and calculate the company value on its base. To put it simply, we added to the stock price of the company its the net debt, ie debt minus cash and cash equivalents. For the sake of clarity, I would also point out that in the case of financial service providers, we assess value of equity because banking is a highly leveraged activity and the structure of banks' liabilities is not comparable to that of non-financial companies.

The value of banks that are listed on the stock exchange such as Coop Pank and LHV is based on their stock price as of 30 Jue 2022. Since then and as of 11 November 2022, the value of LHV has decreased by 12% and the value of Coop Pank has increased by 10%. In this respect, the value of LHV in the ranking is somewhat higher than the current stock price reflects. It's different from the situation last year. Although we could naturally calculate the value of listed companies on the basis of the most recent data possible, we do not do so for the sake of comparability, since non-listed companies generally publish their reports once a year.

Two indicators that are important for banks are ROE (Return on Equity) and P/B (Price to Book). Banks with a higher ROE score are highly valued in the market, ie the higher the return on equity of the bank, the higher its value. We have taken this into account in the case of Bigbank whose ROE is well above the European average. In fact, the actual value of Bigbank could be even higher than shown in the ranking, as its ROE is 21% as compared to 26% for LHV and the P/B of LHV is, for example, 3.7. Those wishing to assess the value of Bigbank compared to LHV should take into account that Bigbank equity stood at 186 million euros as of the end of 2021. This tells me that if Bigbank was listed on the stock exchange, its value would be higher. This is an option worth considering. There are positive examples in the form of LHV and Coop Pank.

The ROE of Luminor is considerably lower than in other banks operating in Estonia and the European average in general. For the past few years, it has been close to 2%, while the average for banks traded on the Northern European and Baltic stock exchanges is between 9 and 10%, and for banks operating in Estonia in the Prudentia TOP101 it is as high as 16%. Nevertheless, we have not made any corrections to date in the case of Luminor. At the end of 2021, Luminor's equity was 1.549 billion euros (this includes its Latvian and Lithuanian branches), which was only second to Swedbank's 1.734 billion. Why the ROE of Luminor is so low (for instance, Swedbank ROE is 11%), I cannot tell.

Speaking of banks, I would also like to congratulate SEB Pank on the highest overall corporate governance performance in our ranking. The score of SEB Pank was 95 out of 100. The average score is 35.5. Congratulations!

Since Prudentia advises companies on mergers and acquisitions, it is important to emphasise that the TOP101 values should not be taken as an indication of the price levels of these transactions. As you know, the price is always settled in negotiations and no transaction is similar.