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Bank Handlowy: 7% yield hard to ignore

We maintain Bank Handlowy as a BUY. The stock performance is flat over last month, outperforming the WIG Banks index by nearly 10%. The stock has lost nearly 20% YTD, pricing in: 1) a poor performance in the corporate segment cost of risk (requiring the bank to make 2 profit warnings in 2Q19 and 3Q19); 2) the stock’s exclusion from the MSCI Poland Index as of May 29. Although the bank is not our favourite in terms of market strategy, we could not ignore its main attraction – its dividend (DPS’20E = PLN 3.57, DY 6.9%). Following the higher than expected corporate segment cost of risk, fuelled by one-off cases, and worse-than-expected NII, we lower our 2019E-21E net profit by 11% to PLN 466m (-27% YoY), by 7% to PLN 606m (+30% YoY) and 8% to PLN 669m (+10% YoY), respectively. Our NI forecast is 14% below consensus for 2019E and 2% for 2020E, but 3% above for 2021E. We appreciate its above-average dividend and low risk profile given insignificant CHF exposure (PLN 54m in 3Q19) and L/D at 64% in 3Q19 and thus we believe the stock is undervalued, trading at 11.1x 2020E P/E, i.e. a 3% discount to the sector. Our FV falls by 5% from PLN 61.0 to PLN 57.7, but still offers 12% upside.