Analysis of Lucerne Cantonal Bank (LUKN:SWX)

Fondée en 1850 dans l’une des plus belles villes de Suisse, la bank cantonale de Lucerne (LUKB) compte environ 300’000 clients, 1’000 collaborateurs et 26 succursales. Sa capitalisation boursière de 3.7 mia en fait la deuxième plus grande banque cantonale cotée du pays, derrière la banque cantonale vaudoise.

61.5% of the shares are in the hands of the Canton of Lucerne, which is legally obliged to hold at least 51% of the share capital. This major shareholder (and the resulting state guarantee) ensures a great deal of stability for the LUKB.

The institution focuses mainly on collecting savings and granting loans, which represent approximately 70% of its revenues.

La banque cantonale lucernoise résiste plutôt bien aux intérêts négatifs. Elle sait maîtriser ses coûts et affichait en octobre 2018 un ratio coûts/revenus (Cost-Income-Ratio) de 47.2%, ce qui la classe parmi les cantonal banks les plus rentables. De plus, le ratio de fonds propres durs s’établissait à 14.3% en mars 2018, une valeur confortable.

Net profit increased by 14.3% between 2011 and 2017, a rather modest increase, but nonetheless very solid in this period of interest rate misery.

LUKB creates value for its shareholders in the long term: the return on equity amounted to 7.4% at the end of 2017, a value lower than that of the undisputed champion (BCV), but similar to the very best cantonal banks (GRKP, BCVS, SGKB).

This observation is confirmed by the excellent stock market performance of around 400% in 30 years (without taking into account dividends), an extraordinary performance for such a defensive company. The icing on the cake is that the stock is not very volatile. Its stock chart over 30 years is virtually a straight line and there have been few corrections above 20%.

Le rendement du dividende est actuellement de 2.7%, une valeur plutôt faible pour une banque cantonale. Point positif, le distribution ratio de 51.3% est raisonnable et se situe dans le bas de la fourchette visée par la LUKB de 50-60%. Des augmentations futures de dividende sont donc très probables. D’ailleurs, la banque a déjà annoncé un relèvement du dividende de 50 centimes l’année prochaine, ce qui correspond à un rendement de 2.8%.

With a PBR of 1.4 and an estimated 2019 PER of 18 (a value slightly higher than its historical average), the Lucerne Cantonal Bank is one of the most expensive cantonal banks.

However, it is a very solid institution, with a conservative, robust and predictable business model. The recent correction in the price represents an interesting opportunity that I have just seized. Even if the price continued to fall, I do not imagine it falling below 400 francs in the long term.