Analysis of Lucerne Cantonal Bank (LUKN:SWX)

Founded in 1850 in one of the most beautiful cities in Switzerland, Lucerne Cantonal Bank (LUKB) has around 300,000 clients, 1,000 employees and 26 branches. Its market capitalization of 3.7 billion makes it the second largest listed cantonal bank in the country, behind the Vaud Cantonal Bank.

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.

Lucerne Cantonal Bank is holding up well against negative interest rates. It is able to control its costs and in October 2018 had a cost-income ratio of 47.2%, which makes it one of the most profitable cantonal banks. In addition, the core capital ratio stood at 14.3% in March 2018, a comfortable value.

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%.

The dividend yield is currently 2.7%, a rather low value for a cantonal bank. On the positive side, the payout ratio of 51.3% is reasonable and is at the lower end of the LUKB target range of 50-60%. Future dividend increases are therefore very likely. In fact, the bank has already announced a dividend increase of 50 cents next year, which corresponds to a yield of 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.