Værdiansættelse af BRFkredit a/s: En virksomhed med store udfordringer

Brian Bay & Jens Anker Nielsen

Student thesis: Master thesis


The purpose of this thesis is to estimate the value of the Danish mortgage bank BRFkredit a/s. BRFkredit was founded in 1959. Today the company is the smallest of five large mortgage banks in Denmark. The other companies in the mortgage sector are all part of big financial groups, which include banks, mortgage banks, realtors, insurance companies etc. – so called financial supermarkets. The Danish Mortgage Model is unlike any other mortgage system. Contrary to other mortgage systems, the Danish model builds on a pass through system that has a relation between the loan and the issued (mortgage) bonds which fund the mortgage loans, known as match funding. The bonds are traded on the stock market. This results in a market priced rate, and the market mechanisms ensures a market pricing of the bonds, and therefore the rates of the mortgage loans. The Danish mortgage sector is tightly legislated, which in many ways is an advantage for all parties. The investors get a fairly safe investment, the borrowers get a cheap mortgage loan and the mortgage banks have a popular product to sell. In the thesis we have made a strategic analysis of BRFkredit combined with an analysis of the historical financial reports, in order to forecast the future financial abilities of the company. The forecast forms the basis of the valuation of BRFkredit. The strategic analysis shows that BRFkredit has a weak competitive position at the moment, compared to the other companies in the industry. The main reasons are their prices and their distribution. The Danish mortgage banks mainly use 3 types of distributors: banks, realtors and themselves through their websites, branches etc. The analysis proves banks to be the most important distributor for the mortgage banks. BRFkredit founded BRFbank in 1995. However, the bank is a lot smaller than the affiliated banks of the competing mortgage banks. Apart from their alliance with the realtor group EDC-mæglerne, BRFkredit only has 2 branches. This is a lot less than the competing companies, which we believe have lead to declining market shares. BRFkredit’s other big problem is their prices. The mortgage loan rates are determined by the market powers as described above. However, lately BRFkredit has not been able to sell their bonds at the same rates as the competitors. One of the reasons is that BRFkredit has a lower issuer rating provided from the international rating company Moody’s. Combined with a rather low solvency and poor financial statements the past two years, the investors seem to demand a bigger return on the bonds as compensation for the matter, which means higher mortgage rates for the borrowers in BRFkredit. The mortgage banks add a contribution rate to the mortgage loan services. BRFkredit has the highest contribution rate of Danish mortgage banks and combined with the highest mortgage rates, this is a competitive disadvantage. The financial analysis shows that BRFkredit make a profit on their core business, even though they still perform worse than their competitors. The fact that the company consistently has been able to increase their net interest income, and still make a profit on the core business, makes it reasonable to assume that the company can turn the decline in the total financial abilities around. The forecast we have made is based on the results of the strategic analysis where we have uncovered the company’s value drivers. We expect BRFkredit to have a rather poor year in 2010 but we expect them to slowly regain their growth and earnings, due to their ability to make profit on their core business and due to the prospects of the other value drivers. We have calculated the value of BRFkredit a/s at DKK 6,210 million. We have estimated the value of BRFkredit based on the Discounted Cash Flow model, the DCF-model, and an excess return model called the RI-model. We have estimated the weighted average cost of capital, WACC, to 8.5 %, which reflect the rather high rate of the company’s obtained hybrid core capital, which is about 8.2 % when adjusted for tax. The level of WACC exceeds the company’s forecasted ability to make return on invested capital, which results in an estimated value below book value of the equity. Sensitivity tests show that the calculated value of the company is very sensitive to changes in WACC and changes in the forecasted assumptions. There are many variables which indicate that the valuation is attached with some uncertainty. The calculated value of DKK 6,210 million corresponds to a price/book value of 0.64. This is about the same level as P/B of banks listed in the Nordic stock exchange. The small cap banks have an average P/B of 0.66. The average P/B of for the listed banks all together, is 0.75. The value of BRFkredit at a P/B of 0.75 is DKK 7,298 million. P/B of the listed banks indicates that the calculated value of DKK 6,210 million is fairly reasonable. Overall we estimate the value of BRFkredit a/s as being somewhere between DKK 5,000 – 8,000 million. The book value of the company as of 31st December 2009 was DKK 9.730 million.

EducationsMSc in Auditing, (Graduate Programme) Final Thesis
Publication date2011
Number of pages155