By Aivars Jurcans

As promised in my previous note last week, a few thoughts about the valuation of Citadele banka. According to the information leaked to the media, the five submitted offers have valued Citadele at between EUR 90 million and EUR 140 million. With reference to results of an express poll of unnamed “experts of the highest calibre”, one of the newspapers suggested that a price range of EUR 180 million to EUR 300 million would be fair and acceptable. Who is right?

The disposal process is apparently being run and the bids have been submitted on the basis of 2013 audited consolidated financial statements. At the end of 2013 Citadele Group had assets of EUR 2 541.5 million, loans of EUR 1 055.9 million, deposits of EUR 2 246.9 million and shareholders’ equity of EUR 143.4 million. It reported net after tax profit of EUR 13.6 million for the year (staff members of our publisher are performing services to KPMG Baltics SIA which is the auditor of Citadele).

In bank valuation the most common value measure is price to book value ratio. On the basis of consolidated financial statements of Citadele for 2013 the bids received would value the bank at between 0.6x and 1.0x its book equity, whereas the anonymous experts had put the mark at between 1.3x and 2.1x.

Our value perception is still somewhat distorted from the pre-crisis years when price to book multiples above 2.0x were common and could reach 5.0x or above in some exceptional markets. Most Western European banks were generating excellent returns from proprietary trading and high risk instruments. Meanwhile, the high growth rates of Central and Eastern European economies and low penetration of banking services offered unbelievable growth prospects for banks. Today’s reality, or, as it is sometimes called, “the new normal” is somewhat different. Persistent doubts about the asset quality and difficulties to estimate the costs of meeting Basel III requirements are just a few factors that have pushed bank valuations globally below the 1.0x multiple. The medium to longer-term outlook for the banking industry is not encouraging; some are even predicting that the banks globally will struggle to generate return on equity above 10% during at least this decade.

Let’s take a quick look at some of the more specific value drivers which are affecting the valuation of Citadele.

Market attractiveness

Although Latvia has been outperforming most of its European Union peers in terms of GDP growth over the last couple of years and is expected to do so in future, the 3-4% growth rate is far below the levels we got used to seeing 10 years ago. The population has been shrinking significantly and is still recovering from the financial crisis. This has certainly affected the banking market, which, according to the Latvian Association of Commercial banks grew only by 1.4% in 2013.

Market share and market position

At the end of 2013 Citadele ranked only # 7 measured by assets, the smallest in the group of banks with assets exceeding EUR 1 billion. Although it has grown faster in 2013 than its main competitors it nevertheless is only half the size of the top ranking Swedbank. In other words, there is no basis to consider Citadele a market leader.

Asset quality

Citadele was established by spinning off the good assets of Parex which, at least in theory, somewhat alleviates the doubts about the quality of legacy assets. Meanwhile, the bank’s management has repeatedly indicated that their credit comfort zone is between EUR 1 million and EUR 3 million and that they are focusing on small and medium sized companies (i.e., below the top 300 largest corporate clients in Latvia). This, by definition, is an inherently more risky asset class which requires close and costly monitoring to safeguard from credit quality deterioration and might require higher level of provisions.

Funding base

As opposed to the Nordic banks in Latvia, Citadele is fully self-funded, with its loan portfolio being at a level of approximately 60% of the deposits held. Meanwhile, almost 75% of customer deposits are demand deposits which can be withdrawn without prior notice. Of course, a significant portion of demand deposits are usually the so called “core” deposits but the relative share of those can’t be estimated on the basis of publicly available information. More than EUR 450 million of Citadele’s financial liabilities, including deposits, originated from the countries other than the European Union as at the end of 2013. The bank prides itself in having significantly increased the quality of its non-resident business. But it is very hard to assess how stable and “sticky” those deposits really are and how they might react to geopolitical, economic or regulatory developments.


Citadele has been able to generate return on average equity (ROAE) of above 11% in 2013, which is not a small achievement. But its return on average assets (ROAA) has been lower than that of its key competitors. This suggests that ROAE were driven not so much by superior returns than by the low level of equity. The bank has been meeting the necessary capital adequacy requirements but the margin is really very thin. The owners – either the present or the new – will have to address the need to increase the share capital and to refinance the subordinated loan of EUR 73.6 million quite urgently.


Even without a deeper comparative analysis the bank’s cost base appears quite high in relation to the business volumes it currently transacts. For example, the bank maintains a branch and service centre network that serves only c. 7.5 thousand customers per outlet, compared to 17.5 thousand serviced by Swedbank. Of course, this might present an opportunity to achieve efficiency gains that would add to the bottom line, but again this is going to take time and costs to get there.

To summarise, Citadele is a fairly sound banking operation in a stable and growing, albeit not spectacularly, market. Despite some of the critical issues highlighted above, it is a good platform to build on and to develop further. But, with the bank being in its present shape and in the current market, I struggle to find any arguments to support why it should be priced at a premium. Thus, like it or not, the bids valuing the bank at a discount to or just at book value of equity might actually reflect the fair market value of Citadele.


Aivars Jurcans

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