Norwegian Finans Holding (NOFI) – Extremely attractive & scalable Fintech business available at attractive valuations
Disclaimer: I/ We have investments in this name and hence my views are biased. Please verify and do your own research on the name. I have used some images from NOFI’s investor presentation, Capital IQ, SEB report, Stifel and Danske bank report in this note.
The core investment thesis is that NOFI provides an attractive risk-reward set up for investors to buy a scaled-up Nordics fintech lending business that is highly profitable (>30% ROE) with multiple growth opportunities at 1.8X book and 7X trailing earnings. The current price warrants an entry position and then we can scale-up or down the position based upon how the situation unfolds. While NOFI is not a fat pitch at this moment because of meaningful uncertainties, I believe that the current risk-reward is too attractive to ignore.
NOFI - Brief Overview
NOFI is an extremely successful FINTECH business with a pan-EU banking license. It has scaled up well in the Nordics unsecured consumer lending space through instalment loans and credit cards on the assets side and retail deposits on the liabilities side. The bank operates on an extremely scalable business model as shown from the fact that it started a decade back with 50 employees and has scaled up its loans book to 3.8 Billion Euros with just 70 full time employees. The top management team has been very stable with strong insider ownership and have executed their strategy flawlessly. It is a branchless bank with all the employees operating out of central headquarters and a small customer centre team operating out of a low-cost location. The bank uses technology for everything from marketing, origination, credit scoring, data analytics, portfolio monitoring, risk management and customer service. The bank was incorporated as a subsidiary of Norwegian Airline Shuttle and currently has a market capitalization of 2 Billion Euros which is double the market cap of its parent.
History of Bank Norwegian:
NOFI – Business Model:
NOFI – Focused Strategy:
Market Share & Growth:
On an incremental basis, NOFI is gaining around 1/3rd of the total market growth in the Norwegian unsecured consumer lending space. The reputation risks for the larger banks along with smaller market size makes them less aggressive players. More importantly, their distribution and funding cost advantages aren’t very useful in this space of small ticket lending where the pure online players are more efficient and better suited.
Highly Valuable Real-Estate:
Convenience is more important than price for consumers in some of the small ticket lending space. With a strong mobile banking application, the distribution of future products becomes easier for the incumbent. The amount of data that the bank gets from a mobile application is much better for credit and behaviour modelling
NOFI – Huge Customer Base:
NOFI has a huge customer base especially in the credit card segment that can be mined for its instalment loans in the future. The parent airline has around 30M customers and that provides a strong brand advantage and also a precious database. The bank has flawlessly executed in scaling up its customer base across geographies despite high competition from incumbents.
Extremely Strong Engagement Metrics:
NOFI’s mobile app currently has 2.6 Transaction every Second on its app, even though the full scaled roll out of the application happened less than 2 years ago. The market share on credit card swipes is increasing at a rapid pace. NOFI’s cards market share as % of total credit card spending in Norway has grown from 11.3% in Q3 2017 to 13.5% in Q4 2017 to 15.3% in Q1 2018. On an average, a credit card customer of NOFI is using his card almost 15 transactions per month. It is a front of the wallet card. The increasing market share and transactions improves the fee income and provides scale advantage is negotiating with vendors.
Strong Growth across metrics:
Loans has grown at a 49% CAGR between 2010 and 2017. Deposits have scaled up in line with loans growth. Deposits/ Loans ratio is at a healthy 1.06
Significant Operational Leverage :
Almost 70% of NOFI’s cost base is marketing. NOFI’s cost to income excluding marketing is sub-10%. ROE dip is because of decreasing leverage. ROA’s increased during this phase.
Strong & Liquid Balance Sheet :
Liquid assets are 24% of the balance sheet, Liquidity coverage ratio is 220% and Net stable funding ratio is 142%.
Less leverage to withstand crisis:
NOFI’s Debt: Equity ratio is only around 4.28X. Average deposit size is 200K NOK which is below the state deposit insurance guarantee. The regulator last year added a 4.2% pillar 2 requirement.
Stable Team with insider ownership:
Tine Wollebekk took over as CEO last year after heading Telenor’s fintech team. The previous CEO led the company from founding until retirement. Pal, the CFO, has been with the team since the founding of NOFI and was also the interim CEO during the transition last year. He owns around 5 Million Euros worth of shares in the firm. The parent airline owns around 20% shares in NOFI (including the total return swap). The promoter family also owns 5% of NOFI directly as well. Bjorn Kjos was asked to step down from the board of NOFI by the regulator as he continues to run the airline. The net financial interest for the promoters currently is higher in NOFI than in NAS and that provides us comfort on aligned interest.