EUR 150.00 For Business Accounts Only

Bank Pekao: Dividend is not enough

We have downgraded Bank Pekao to NEUTRAL from BUY. The stock lost nearly 12% in a month, underperforming the WIG Banks index, as recent changes to the management board with the sudden departure of the CEO just after the 2020E strategy update conference lowering the ROE target have not helped sentiment. We believe the bank is well positioned to outperform the market with its exposure to FX mortgage risk much lower vs peers, a decent 2020E DY of 6.6% and cost-cutting initiatives that should allow for strong 2020E NI 14% growth versus 4% expected market growth. On the other hand, we dislike the looming state-ownership risks, inflated market expectations and poor cross-selling performance in the retail segment. We have adjusted our 2019-2021E earnings for: 1) better-than-expected 3Q19 results; 2) expected result of September’s CJEU ruling concerning the return of the early repayment of consumer loan fees (annual negative impact of some PLN 100m on NII, fading over time); 3) higher BFG fees (some PLN 70m annually); 4) introduction of the gradual portfolio provisioning of FX loans following the less favourable court rulings (PLN 38m, i.e. 1% of the portfolio in 4Q19E and PLN 76m, i.e. 2% of the portfolio in the following years). We revised 2019-21E NI by -2%/-9%/-6%. We forecast 2019E-20E NI of PLN 2.19bn (-4% YoY), PLN 2.49bn (+14% YoY) and PLN 2.72bn (+9% YoY), respectively. Our earnings expectations differ from consensus by -3%/-5%/-4% in 2019-21E. PEO trades at a 2020E P/E of 10.2x, a 12% discount to PL banks at 10.9x. Our new PLN 104.5 FV (was PLN 125.3) (including an expected CHF portfolio loss of PLN 2.5ps, i.e. 2.3%) offers +8% upside potential.