Only small impact from potential ECB rate reduction

Henry Wendisch04 Jun 2024 05:43

On Thursday, June 6th, the ECB might reduce its main refinancing rate by 25bps to 4.25%, which would have only a small overall impact on MLP's banking business while in return should allow for upswings in Wealth Management and Real Estate. In detail:

Low impact on Banking: A potential rate reduction by 25bps is already reflected in our estimates for the end of Q2. Now with Q2 only lasting for three more weeks, we feel comfortable with our current estimates. Therefore, the strong interest income experienced in Q1'24 (€ 22.3m) should only decrease slightly to € 20m (eNuW) in Q2, before the potential 25bps rate drop takes a full effect for Q3 with € 19m of expected interest income. For Q4, we conservatively model another 25bps rate reduction to 4.0% which would imply an interest income of € 18m. Accordingly, we expect interest expenses to also decrease, as MLP would likely reduce rates for customer deposits, however with some delay. In sum, FY'24e interest income would still come in at € 80m, 22% above FY'23, while the interest result should amount to € 49m, 4% above FY'23 levels. Should rate reductions be postponed or completely abandoned this year, our estimates would thus turn out to be conservative. (see p. 2 for details)

Upside for Wealth Management: As capital marktes usually react positively to decreasing rates, the ongoing strong performance of FERI's funds could yield further performance fees in the course of the year. As these are not reflected in our estimates, there could be further upside from Wealth Management for MLP. However, the main funds (EquityFlex and Optoflex) are heavily focused on US markets, which is why the FED interest rate is more relevant here. 

Recovery of Real Estate from low levels: The newly introduced tax incentive for new constructions coupled with the outlook of declining financing rates (currently 3.7% for 10y fixed rate mortgages vs. 4.2% in Nov'23), could give the still burdened real estate market a little push towards normalization from muted levels.

All in all, MLP's well diversified business model should make investors feel relaxed about potential rate reductions, especially as the business segments are negatively correlated.

Against this backdrop, we reiterate our BUY recommendation with an unchanged PT of € 11.50 (based on FCFY and SOTP) and confirm MLP's position in our NuWays' AlphaList.

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