Description

I recommend purchasing FinecoBank – an asset gatherer that is essentially the Italian version of Charles Schwab.  Just as Charles Schwab has been able to consistently generate net inflows and gain share in the US for decades, I expect FinecoBank to do the same in Italy.

Like Schwab has been in the US, FinecoBank in Italy would be a major beneficiary of rising interest rates.  Current futures market expectations imply that this won’t be happening anytime soon in Europe – meaning that FinecoBank’s exposure to interest rates is a low priced option now.

Moreover, there has been technical pressure on FinecoBank’s stock price recently due to UniCredit’s decision to sell off its remaining 35% stake in FinecoBank in two tranches (in May and July of this year).  This overhang is now gone. Just as UniCredit’s decision to sell off much of its FinecoBank stake in 2016 provided a buying opportunity then, I believe a similar buying opportunity has been created now.

Company History/Description: Essentially the Italian Charles Schwab

• 1999: Established (by Italian bank Bipop Carire) as a direct bank and discount broker

• 2001: Becomes #1 online trading platform in Europe by 2001

• 2002: Becomes part of Capitalia (another Italian bank) due to merger involving parent Bipop Carire

• 2007: Becomes part of UniCredit due to merger of Capitalia with UniCredit

• 2008: FinecoBank (still a part of UniCredit) merges with Xelion, expanding FinecoBank’s network of 3rd party financial advisers

• 2014: UniCredit IPOs FinecoBank, selling a ~35% stake and retaining ~65% ownership

• 2016: UniCredit sells another ~30% of FinecoBank, bringing its ownership stake down to ~35%

• 2019: UniCredit announces plans to sell its remaining ~35% stake in FinecoBank

Let’s say you’re an Italian with money to invest.  Traditionally, you would go to your local bank. The bank can of course provide you with checking and savings accounts.  In addition, they can also provide wealth management services. But the menu of funds offered will be limited (typically all from that particular bank’s captive asset management arm) and they will be high cost.

FinecoBank provides an alternative to this.  They provide checking and savings accounts. If you prefer a DIY investing approach, you can use their low-cost online brokerage platform to invest in stocks and bonds.  If you want more service, you can invest with the help a FinecoBank affiliated 3rd party financial adviser.  Importantly, FinecoBank will provide you with a menu of thousands of funds and ETFs to invest in, and the all-in cost will be lower than what you pay at traditional bank.

In providing these services, FInecoBank makes money primarily in three ways:

1)      Net interest income on deposits and idle cash in brokerage accounts (~45% of LTM net revenue)

2)      Asset management fees charged on amounts invested in mutual funds or managed accounts (~35% of LTM net revenue)

3)      Commissions and trading income resulted from client trades (~20% of LTM net revenue)

From a customer perspective, FinecoBank’s offering is differentiated from competitors in terms of choice, transparency, and price.  As a result, FinecoBank is a steady share gainer, as evidenced by inflow rates averaging around 10%:

From a shareholder perspective, FinecoBank’s model is attractive because it is low-cost and scalable.  As an online bank, FinecoBank does not have branches. FinecoBank’s financial advisors have physical locations, but these financial advisors are independent (they make money on a revenue share arrangement), so FinecoBank is not on the hook for these locations.  Over the last 5 years (1Q14 to 1Q19), FinecoBank’s FTE count is up 20%, well below growth in client assets of over 60%. As a result, FinecoBank benefits from operating leverage:

Summary Financials:

Why Now?

After reaching highs over €12 per share in April, FinecoBank’s stock price is down nearly 20% on a combination of declining interest rate expectations in Europe as well as UniCredit’s decision to completely exit its stake in FinecoBank:

UniCredit’s decision to sell its remaining 35% stake in the company obviously has put technical pressure on FinecoBank’s stock price.  There is also the concern that UniCredit, which knows FinecoBank well, could be choosing to sell now because it thinks FinecoBank is overvalued.

UniCredit hasn’t been the savviest seller of FinecoBank shares in the past, however – late 2016, after UniCredit sold down its stake from 65% to 35% proved to be an excellent buying opportunity in FinecoBank.

The other factor putting pressure on FinecoBank shares recently has been declining interest rate expectations.  As recently as three months ago, the futures market expected gradual rate increases from here, with Euribor turning positive by late 2021.  Now, the futures market expects rates to decrease further from here, with Euribor not turning positive until 2023:

Recall that about 45% of FinecoBank’s net revenues currently come from net interest income.  Management calculates that a 100 bps parallel shift in Euribor rates would boost net interest income by €113 million – at a 30% tax rate, this would be a €0.13 boost to EPS, a >30% boost from current LTM EPS of €0.41.

The value of this interest rate “option” for FinecoBank has of course decreased in recent months with the shift down in the yield curve.  But at current levels for interest rate expectations, the upside/downside is asymmetric, making now a good time to own FinecoBank – although I acknowledge that similar declarations about European interest rates (“they can’t possibly go lower from here!”) could have been made for most of the last several years.

Valuation:

At 25x LTM EPS (and somewhere in the low-20s on a forward basis), FinecoBank does not look obviously cheap.  But given the long runway I believe the Company has to continue to gain share, I think the current valuation is reasonable.  FinecoBank’s client assets currently total €74B, representing less than 3% share of total Italian investable assets of somewhere around €3 trillion.  I estimate that Charles Schwab last had similar market share of US investable assets more than 15 years ago, and Schwab routinely traded for higher P/E ratios then than FinecoBank does now – and Charles Schwab proved to be a great stock to own for the long run at those levels.

Risks:

• It’s a bank

• Their interest-earning assets are deployed conservatively, however.  About 85% of the portfolio is invested in gov’t securities and UniCredit bonds (which UniCredit is collateralizing in favor of FinecoBank as part of the separation), with only 15% in loans.

• European interest rates stay low indefinitely

• Potential dis-synergies from UniCredit separation

• UniCredit is granting FinecoBank customers full access to UniCredit ATMs through 2039

• UniCredit is granting FinecoBank the option to buy the FinecoBank trademark at fixed prices in windows running through 2032 – the price has not been disclosed, but FinecoBank has indicated that the purchase of the trademark is not large enough to “have a material impact on its capital position”.

• Breakup of EU

Catalyst

• Passage of time/continued inflows/continued earnings growth

• Increasing European interest rate expectations (although I don’t pretend to predict when that will happen)