Under the EC-approved restructuring plan, SNS REAAL has to repay € 565m of State aid and a € 282.5m repayment penalty by the end of 2013. Given SNS REAAL’s current earnings capacity integrating further impairments at the PF and SME BUs and higher capital requirements under the Basel III and Solvency II framework, it is unlikely that it will be able to repay the State Aid on time.
This leaves two major scenarios: either the EC adopts a pragmatic approach that allows the prolongation of the Dutch State aid with full repayment in FY15E, or it sticks to the initial restructuring plan and demands full repayment by the end of 2013.
Our going-concern scenario values the banking activities (ex PF) at 75% of IFRS book value and SNS PF at 50% of IFRS book value. The insurance activities are valued at 70% of IFRS book value but with a separate 50% hair cut on VOBA/DAC and a 25% hair cut on all other intangibles. The B-shares (nominal value of € 600m) are stripped out as well as the repayment penalties to be paid for both the Dutch state aid and the Foundation aid. This would leave a valuation per share of € 3.30.
Our break-up scenario values the retail banking activities including SME at 50% of IFRS book value and SNS PF at 25% of IFRS book value. The insurance activities are valued at 35% of IFRS book value integrating full write-down of VOBA/DAC. The resulting Price-to-Tangible-Book would be 50% for both banking and insurance.
Both the B-shares (€ 600m, included in equity) and the Foundation core capital securities (€ 435m) are loss-absorbing which means that in a break-up scenario it would have to be added back to capital. Any remaining positive proceeds should however be distributed between ordinary capital, the B-shares and the Core capital securities on a quota-share based on the initial nominal values. This would imply that c. 40% of the break-up value would accrue to the B-shares and c. 30% to the Core capital security holder (the Foundation as well). This would leave a valuation per share of € 0.72.
Our View:
No decision has been taken yet, but history and EC policy show that a rigid response is a distinct possibility, hence the downgrade of our target price to € 2 per share, which is a compromise between a break-up scenario valuation and a going-concern scenario valuation.
Conclusion:
We maintain our Accumulate rating but with a reduced target price at € 2.0.