Value Ideas Blog
Banque Privée Edmond de Rothschild

Intro

The overall banking business model is simple. Banks receive money from clients which are depositors and the capital markets and lend to other clients which are borrowers, therefore banks make a profit from the interest spread. If a bank borrows money from a depositor at 4 percent and lends it out at 6 percent, the bank has earned a 2 percent spread, which is called net interest income. Furthermore banks also earn money from basic fees, assets under management (AUM) and other services, which is usually referred to as income from fees and commissions or simply noninterest income. If we combine net interest income and noninterest income we end up with the net revenues of a bank or its top line. A further point which is less obvious is that consumers are actually paying for the liquidity services as well.

The center of banking is, due to my experience of working for a bank, one thing: risk management. Banks have to deal with three different types of risk: credit, liquidity also known as “Fristentransformation”, and the interest rate environment. Borrowers and lenders pay banks through interest or fees because they are unwilling to manage the risk on their own, or because banks can do it more cheaply. There are only a few other business in the world where you can take money from people and effectively charge them to take it off their hands. That’s the banking and insurance business model in a nutshell.

But there are many banks, asset managers and insurers out there, most of them in the same country and the same business segment and after all, financial products and services tend to be generic. Despite this fact most of the banks and the finance industry earn some decent returns for themselves and their investors, which is a first sign of a potential moat.

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So, is there “a puff left” now?

In order to answer this question we need to take closer look into the structure of 3U Holding (3U). As the name suggests, 3U Holding holds a series of stakes in other companies. Benefits of this approach include synergies in terms of purchasing, facilities, legal, accounting and business administration, plus the possibility to add up profits and losses, and so save taxes. However, as blog readers have already commented rightly, the overhead costs for management and shared central functions are significant, i.e. roughly 3.5 million per year (0.10  Euro per share per year). read more

Review

Today I would like to give you an update and final valuation of our Sto AG analysis. Last time we wrote that: “We can see that Sto AG is benefitting strongly from the trend towards renovating building facades with a view to saving energy and the new laws which implies new energy standards for houses. This is by far the most reliable and practical way to save fossil fuel – it does not require the wind to blow or the sun to shine.” And that the company has a long history of innovations which are driving out the great understanding of the market and the needs of the craftsmen at the construction site. This is also the root of the company’s direct sales approach to the craftsman and construction companies.  

Industry development

For this reasons we would like to show you how the industry itself has developed over the last years and if Sto has only profited by this development of the industry or if Sto is an outstanding player in the industry of heating insulation. In the following chart you can see the change of the market size of heating insulation in m². You can observe a high volatility in the chart, which is clearly linked to the construction boom of the late 90’s and the years after 2005. read more