Yi Qian – A small German bank recovering from the last financial crisis now becomes an interesting investment case

IKB Deutsche Industriebank AG is a small German bank. It was the first German bank to have been negatively impacted by the sub-prime crisis in the US and then bailed out by the German banking system. IKB has been cleaning its balance sheet for over 10 years. It is now a very simple bank focusing on German SME corporates with €17bn total assets at end-FY20. It is active in the German Mittelstand market with lending to the SME companies via either its own balance sheet or the KfW public programme.

This simple strategy proves to be quite solid for IKB. It ended 2020 with a very solid 14.3% CET1 ratio after paying its first dividends of the past 15 years. Having not been rated since the GFC, the bank just recently received an investment grade rating of BBB (negative outlook) from Fitch and Baa1 (stable outlook) from Moody’s, which is very reassuring. We have some investments in IKB’s Tier 2 subordinated bond, offering a 4% coupon and maturing in 2028 with the first call date in 2023. This bond’s price has been up by over 20% to 101.6 recently from the low of 83.7 in May 2020. With IKB’s balance sheet cleaning and cost saving efforts, it is very likely this Tier 2 will be called on the first date. It currently offers a very attractive 3.06% yield to call for a Tier 2 callable in 2023. In comparison, Barclays’ 2% 2028 Tier 2 only offers 0.6% yield to call in early 2023.

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