Banking Sector Update – It’s The Economy, Stupid!

Banking Sector Report – It’s the economy, stupid!

 

• Since our last report, the big picture regarding CEE banks remained the same with more risk to the downside as global macroeconomic environment becomes less supportive.
• Outlook for margins turned more negative amidst communication of central bankers, who are not in a hurry to increase rates given the weaker than expected economic data thus volumes and cost control will be the name of the game in the next periods while we should get use to a structurally lower risk cost moving forward.
• Banks in our coverage performed poorly (underperforming both the European banking index as well as MSCI ACWI), apart from OTP which was the best performer amongst the names in the CEE since we upgraded to Buy in October.
• Despite the diminishing fear related to the banking tax, we expect volatility to persist on the Romanian market as the budget question remains, particularly as special taxes will not solve the problem. This overall would not change our positive stance on BRD and BT, but investors watch out for this risk.
• We downgrade OTP to Accumulate from Buy after the sharp share price rally. We still believe the Bank is attractive (offers 15.5% upside) and would generate ample earnings in the next years, nevertheless the outperformance relative to other names could lose some steam, particularly if automotive industry comes under pressure, given that Hungary is exposed to this sector and sentiment may turn negative.
• We still hold the view that banks in our coverage are trading below their Polish and Czech competitors, discount on a PE level is 25.7% (8.5x vs. 11.4x on average), on a PBV level the difference is also 22.7% while return on equity does not justify this cheapness.
• On a risk reward level, we still prefer CEE banks and would rather buy OTP or Erste which have balanced portfolios throughout the region, than keeping Western European names. It’s clear that both of them trades at premium compared to SX7E banks (where periphery regions dominates), nevertheless  in an economic  downturn, we suspect banks in our region built up a strong war chest in the last couple of years in terms of NPL formation, coverage as well as capital ensuring more resilience  in the sector.

 

 

		Target price	Current price	Upside (total return)	Rating	Why Buy?	Biggest risks
1	Raiffeisen	30.0	20.0	54.7%	Buy	Very large discount to peers, exposure to CEE and SEE	Russian sanctions, money laundering fines
2	TLV	2.7	2.1	40.4%	Buy	Acquisition integration, stable dividend, big discount to peers	Country and political risk
3	BRD	16.1	13.2	34.5%	Buy	Big discount to peers, ample dividend	Country and political risk
4	Erste	37.3	32.8	18.1%	Accumulate	Good, stable exposure to CEE	Cost inflation, slower NIM expansion
5	OTP	14,330	12,600	15.5%	Accumulate	Further acquisitions, Hungarian growth, exceptional ROE	Russian sanctions, cost inflation, acquisition integration completion

 

 

 

Hai Thanh Le Phuong, CFA
Head of Research

CONCORDE SECURITIES LTD.

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