EUR 150.00 For Business Accounts Only

PKO BP: Risks outweigh rewards

We have downgraded PKO BP to a SELL from BUY. We lowered our FV by 37% from PLN 48.5 to PLN 30.5 (incl. an expected CHF portfolio loss of PLN 4.1 per share, i.e. 11.5%), which implies 13% downside. The stock price is down 6.3% YTD. It trades at a 2020E P/E of 10.8x, below the sector (11.6x). Given the size of the bank and escalating risks in the sector as stated by the Polish Central Bank, we believe the discount is warranted. State ownership nowadays adds even more risk to the valuation, namely: 1) press speculation that the bank could lose its CEO (Rzeczpospolita daily, 08/11/19); 2) PKO could be forced to take part in the restructuring process of the sector’s troubled lenders (the equity gap according to NBP estimates amounts to some PLN 3.7bn and spikes to PLN 11.8bn in the stress scenario); 3) PKO named among leaders in potential acquisition of mBank at any cost. We have adjusted our 2019-2021E earnings for: 1) better-than-expected 3Q19 results; 2) expected result of September’s CJEU ruling concerning return of early repayment of consumer loan fees (annual negative impact of some PLN 160m on NII, fading over time); 3) higher BFG fees (some PLN 120m annually); 4) introduction of the gradual portfolio provisioning of FX loans following the less favourable court rulings (PLN 230m, i.e. 1% of the portfolio in 4Q19E and PLN 460m, i.e. 2% of the portfolio in the following years). We left our 2019E NI unchanged at PLN 4.28bn (+15% YoY) but lowered our 2020-21E NI by 8% and 11% to PLN 4.04bn (-6% YoY) and PLN 4.36bn (+8% YoY), respectively. Our earnings expectations differ from consensus by -4%/-13%/-10% for 2019-21E, respectively. This is in our opinion largely due to additional provisioning regarding the CHF mortgage portfolio. At the same time it needs to be noted that the provisioning is very unpredictable, both in terms of its appearance and magnitude.