Recently, I have found value in banks, specifically, JPMorgan Chase & Co. (JPM), and Lion Finance Group PLC (LON:BGEO), and now, with Danish regional bank, Ringkjøbing Landbobank A/S (CPH:RILBA, 1400 kr.), the subject of this thesis. With a favourable capital cycle, a robust and resilient business model, and a history of profitability, the firm’s valuation creates a very attractive entry point for investors. This stock forms part of my model portfolio with a very attractive rating.
Scope for Healthy Credit Expansion
Global interest rates have been in suprasecular decline for the last eight centuries, and Europe and Japan’s flirtation with negative interest rates may, in time, be seen as a return to a historical trend, rather than the aberration it is currently viewed as. Having reached near-zero interest rates in early 2019, Denmark emerged from a brief period of negative interest rates in early 2022, lifting net interest margins (NIM), which peaked in October 2023. Since that peak, the NIM has been under pressure, with Ringkjøbing Landbobank noting that in addition to this, “continuing keen competition for loans resulted in pressure on the lending margin”.
Regulators report that banks’ deposit margins are at historically high levels, driven by abundant deposits and positive policy rates, while lending margins have fallen to record lows. In other words, banks pay more on deposits but have not raised loan rates commensurately. The Danish Financial Supervisory Authority (FSA) cautions that record‐low lending margins for households may underprice underlying risk. Nonetheless, banks’ profits have surged, with credit institutions earning a record 71.4 billion Danish kroner (kr.) pre‐tax in 2023, about 30 billion kr. above 2022, driven chiefly by higher net interest income thanks to the wide deposit‐loan spread. The Systemic Risk Council likewise notes “high earnings and moderate lending growth” are allowing banks to build capital, even as lending margins on new household loans continue to decline.
Credit is supplied endogenously by banks to meet profitable loan demand, creating deposits and driving aggregate demand. Historically, this credit‐driven process can amplify business cycles, as rising loans fuel an asset boom and bust cycle. In Denmark, medium‐term swings in house prices and credit are tightly linked to GDP, with Nationalbanken noting that peaks in financial cycles often precede crises.
Recent Danish data show moderate credit expansion. Private housing debt grew only 0.6% in 2024, up 12.2 billion kr. to 1.94 trillion, finally surpassing its mid‐2022 peak. Nationalbanken attributes this to higher real incomes and falling long rates, which have kept house‐price inflation subdued. Mortgage institutions’ outstanding lending is climbing again, after 2022’s plunge, as rates stabilised in 2023, but overall loan growth remains modest in historical terms. Commercial bank lending to businesses has been mostly flat, while mortgage credit to firms is rising.
With dividend restrictions imposed by regulators in the wake of the Covid-19 pandemic, banks were left with excess capital to deploy. That, alongside strong balance sheets, with a current non-performing loans (NPL) ratio of 1.9%, led to a wave of consolidation, which in turn boosted shareholder value. Rising interest rates and deepening consolidation have continued, leading to strong results in the industry, with profitability doubling in the last two years. However, consolidation in Demand, and indeed across Europe, is at such high levels now that it is bound to slow down.
Banks now face the prospect of higher expenses, and squeezed net interest margins and growing loan losses as a consequence of this epoch of uncertainty, although only the first has materialized.
Denmark’s robust employment and real incomes support sustainable household borrowing, and banks’ high profits and capital buffers mean there is ample capacity to lend. Indeed, the systemic council maintains a 2.5% counter-cyclical capital buffer to allow creditworthy lending to continue. Current conditions, defined by subdued growth in credit volumes, stable banks’ liquidity, and plentiful capital, permit moderate loan growth.
A Low Cost Regional Giant
Ringkjøbing Landbobank is a regionally focused retail and small-to-medium enterprises (SME) bank in Denmark that describes itself as a “customer-focused relationship bank” in Jutland, with branches in Copenhagen and Aarhus for niche clients. The bank serves household and business clients with a full suite of products, but concentrates on markets in West, Central and North Jutland. It also pursues niche segments: private banking for affluent individuals and medical professionals, financing of renewable energy projects (wind, biogas, solar), and select commercial real estate financing. In all its lending, the bank’s philosophy is conservative: it typically requires first‐lien security and closely monitors credit quality through its robust evaluation models. The bank’s low and secularly declining cost/income ratio and its good credit quality are what makes it so unique and able to generate a high free cash flow (FCF) and a strong revenue shield.
Strategically, management emphasizes organic growth through cross‐selling and deepening relationships, backed by strong personal advisory service and enhanced digital capabilities. The CEO, Mr. John Bull Fisker, highlights the mantra “the customer is king”, aiming to offer all functions that matter and partnering where others excel. Notably, Landbobank has invested heavily in digitalisation and staff training to combine the benefits of personal advice with efficient execution. This dual focus on personal service and technology is a core element of its business model, and management cites its low cost structure as evidence of efficiency, with the cost/income ratio remaining below 26% in Q1 2025.
A Customer-Centric Brand
Independent surveys consistently rank it very highly for customer satisfaction and brand image. The bank itself notes that its “strong image and high level of customer satisfaction” drove a large increase in new customer relationships. This virtuous cycle helped grow loans, up and deposits, up 10% and 8% respectively in 2024. Such loyal retail and SME customers allow the bank to maintain high margins on new business despite overall margin pressure and keep impairment rates negligible.
Extreme Efficiency
The bank’s cost/income ratio is among the lowest in Danish banking. With a less-than 26% cost/income ratio, the bank boasts superior efficiency to the wider Danish banking sector, and the wider European banking sector, which boasts a cost/income ratio of 53.89%. This, as aforementioned, supports high profitability. The bank’s 22% return on equity (ROE), at 22% in Q1 2025, is nearly double the 12% Danish banking sector average. The firm’s return on invested capital (ROIC) has improved from 14.26% in 2020 to 20.7% in the LTM.
Exceptional Financial Strength
Ringkjøbing Landbobank’s very strong capitalization and conservative funding mark it out. At the end of Q1 2025, the bank reported a common equity tier 1 (CET1) ratio of 15%, and a total capital ratio of 15%, compared to a 28.2% Minimum Requirement for own funds and Eligible Liabilities (MREL) capital ratio. With a loan‐to‐deposit ratio of 99.15%, nearly all lending is funded by stable retail deposits, giving a very strong liquidity profile. Regulations demand that the bank maintains a statutory requirement of at least 100% for both the liquidity ratios Liquidity Coverage Ratio (LCR) and Net Stable Funding Ratio (NSFR), and it has done so, with an LCR of 184.1% and an NSFR of 118.8%. With one of the highest capital and liquidity cushions of any Danish bank, it is extremely resilient.
Earning Attractive Profits
Since 2020, Ringkjøbing Landbobank’s operating revenue has compounded by 17.14% a year, from 2.39 billion kr. to 5.27 billion kr. in the last twelve months (LTM), compared to a 6.9% and 5.2% global mean and median 5-year sales CAGR respectively. In that time, the bank’s net operating profit after tax (NOPAT) compounded by 15.22% annually. NOPAT margin, however, declined in that period, from 47% to 43.25%.
FCF Generation Supports Dividend Payments
Ringkjøbing Landbobank’s rising profitability has given it the platform to generate meaningful free cash flow (FCF), with the bank generating positive FCF throughout the analysis period, and a cumulative 6.69 billion kr. over the last five years, equal to 19.17% of its present market capitalisation. Ringkjøbing Landbobank’s 2.3 billion kr. in FCF over the LTM equates to an attractive 6.48% FCF yield. The firm’s FCF generation supports its dividend payments, with the firm paying out 1.19 billion kr. in dividends in the last five years, compared to 6.69 billion kr. in FCF generated. This demonstrates the prudence that guides the firm’s dividend payment policy.
Priced for a Fall in Profitability
At the current price, Ringkjøbing Landbobank has a price-to-economic book value (PEBV) of 0.71, implying that the market expects its NOPAT to permanently fall by 29% from current levels, despite the firm’s history of earning attractive profits.
Using my reverse discounted cash flow (DCF) model, I tested a variety of scenarios to unearth the cash flow expectations baked into Ringkjøbing Landbobanks current stock price. Afterwards, I analyzed the implied value of the stock based on different and conservative assumptions to predict the bank’s future growth in cash flows.
In the first scenario, I modeled the catastrophist scenario implied by Ringkjøbing Landbobank’s current stock price. In this scenario, I assume:
- Revenue declined by 5% a year,
- NOPAT margin falls to 30.08%, its lowest level in my analysis period.
In that scenario, the company’s market-implied competitive advantage period (MICAP) is less than a year, at which point its shareholder value per share equals the current price.
In the second scenario,
- Revenue grows by 11.33%, its 3-year CAGR, and,
- the bank maintains its current NOPAT margin of 43.52%.
In this scenario, the stock is worth 2,335 kr., an upside of 66.79% from the current price.
In the final scenario,
- Revenue grows by 10%, and,
- NOPAT margin falls to 37.59%.
In this scenario, the stock is worth 1993.43 kr., an upside of 42.36% from the current price.