EUR 150.00 For Business Accounts Only

Alior Bank: Consumer loan risk takes its toll

We downgrade Alior Bank to SELL from BUY. We admit we were wrong upgrading the stock in September, not having the full picture on the potential impact of the CJEU ruling about the return of the early repayment of consumer loan fees. Instead the share price has dropped 31% in the last 3 months as a reaction to: 1) a profit warning, with an expected negative annual NII impact from the CJEU verdict of some PLN 320m (i.e. some 35% of our former NP forecast); and 2) exclusion from the MSCI Poland Index (announced on Nov 8th). The bank’s clear advantage is lack of FX loans, but on the other hand we dislike the inflated market expectations, the looming state-ownership risks and low ROE. We have revised our forecasts based on the following factors: 1) lower profitability of the consumer lending business, based on the implications of September’s CJEU ruling concerning the return of the early repayment of consumer loan fees; 2) slower growth in operating expenses following better than anticipated costs growth in 9M19 offset somewhat by higher BFG charges; 3) slightly lower net provisioning in 2020E-21E based on a 1% cut to loan growth (+6% YoY in 2019E and +4% YoY in 2020-21E) and expected change in the strategy towards more asset-based loans. Thus we lower our 2019E NI estimate by 29% to PLN 410m (-43% YoY), 2020E net income by 36% to PLN 446m (+9% YoY) and by 39% YoY to PLN 466m (+5% YoY). Our earnings expectations are below consensus by -18%/-32%/-38% in 2019-21E. Alior Bank is trading at a 2020E P/E of 8.2x. While a 28% discount to Polish peers (at 11.3x) seems attractive, its 2020E ROE (at 6.3%) is also far below the sector average at 8.5% and COE at 10.5%. We cut our FV by 50% from PLN 49.7 to PLN 24.9, but this still implies 11% downside.