CEE Banking Sector - Coping with the headwinds - IPOPEMA
We update our recommendations for Polish banks following decent earnings in the first half of the year and good prospects for further improvement in 2H19 and in 2020. On the other hand we also model in risk coming from FX-mortgages portfolio, which became recently the most visible driver in the sector (to some extent reflected in the share prices in our view). In this report we also initiate coverage of two Romanian banks with a positive view. Our top-pick in the sector are: Pekao, ING, Handlowy, Alior, Banca Transilvania and BRD.
Polish banks
2019 is another year with growing earnings in Polish banking sector and we expect this to continue in 2020E too, but deceleration to mid-single digit dynamic should be expected. Key topic in the months ahead will be risk concerning FX-mortgage portfolios and future rulings of Polish courts, which can generate substantial costs for the sector if they turn out to be more and more favorable for FX-borrowers. We do not expect doomsday scenario, where share issues will be needed, whereas significant legal provisions can be booked, more likely in 2020. In this environment we prefer defensive names which should maintain their dividend and growth capacity in case other competitors are hit hard. We also factor in increase in BFG costs however do not expect Polish lenders will be directly involved in rescuing GNB or Idea Bank if resolution procedure will be launched. But we also think that market is already partially reflecting risks that sector is facing. When we look at P/E ratio for the sector it is 17% below multiyear average, many banks trade below its book value, what suggests fear is there on the market. This is why we are not overly pessimistic about performance of the sector.
Romanian banks
We initiate coverage of Romanian banks with positive recommendations. We are initiating coverage of the two Romanian banks with a Buy rating for BRD, a FV of RON 15.58 per share and 16.1% upside and a Buy rating for Banca Transilvania, a FV of RON 2.69 per share and 13.9% upside. While we see more risks accumulated in the economy due to the increasing twin deficits, our main scenario is for a soft correction and a slowdown in growth. In the meantime tough, more increases in salaries and pensions are keeping the consumption momentum high and allow a still good discipline of payment. As a result, we think the banks are likely to outperform the consensus expectations in the next 12 months and still report strong results on the back of still low cost of risk, strong margins (as the deposits interest rates are very low) and compressing yields on the bonds portfolio. The effect of the tax on banking assets seems also to be lower than initially anticipated. Additionally, the banks are well capitalized and we think that also the dividend yield will continue to be high this year. We expect it at 11.6% for BRD and 6.8% for Banca Transilvania. On the long run, we continue to see the two banks as the best way to get exposure to the fast developing local economy, benefiting from a growing level of financial intermediation, higher spending power, and the development of the local enterprises but also the improvement in the living conditions, housing, and infrastructure. Over the long run, we like the more aggressive expansion strategy of Banca Transilvania and we think the banks offers a proper exposure to the local growth. However, purely on valuation grounds and as we think BRD is a safer play in times of growing imbalances; we have a higher upside in the current report on BRD.
Alior Bank is a universal lending and deposit-taking bank which renders services to individuals, legal persons and other entities which are Polish and foreign persons. Co.'s core activities include maintaining bank accounts, granting loans and advances, issuing banking securities and purchasing and selling foreign currency. Co. also conducts brokerage activities, consulting and financial agency services and renders other financial services.
Bank Handlowy W Warszawie is a Polish bank holding company engaged in a wide range of banking services for individuals and corporate customers in the domestic and foreign markets. Additionally Co. operates in brokerage operations, lease services and investment operations. Customers have access to these services at the branches, ATM's, telephone services and electronic banking services.
Bank Millennium provides various banking products and services to individual clients, small businesses, corporate, and public sector entities in Poland. Co. offers current account, custody account, and escrow account; standard deposits, negotiated deposits, millenet deposits, and automatic overnight deposits; debit and charge cards; funds management; professional cash services; and management of balances of current and auxiliary accounts. Co. also provides current account overdraft facility, real estate loans, revolving credits, working capital loans, investment loans, energy financing facility, sureties, line of guarantees, letters-of-credit, preferential loans, and bid bond guarantees.
Bank Polska Kasa Opieki (the Bank) is a commercial bank providing a range of banking services, mainly in Poland. The segments of the Bank are as follows: Retail banking, which comprises all banking activities related to retail customers and small and micro companies; Private banking, which comprises all banking activities related to the affluent individual customers; Corporate and Investment banking, which comprises all banking activities related to the companies, interbank market, debt securities and other instruments; and Assets and Liabilities Management and other, which is engaged in the supervision and monitoring of fund transfers, and other activities centrally managed.
BNP Paribas Bank Polska SA, formerly Bank BGZ BNP Paribas SA and Gospodarki Zywnosciowej SA, is a Poland-based bank. The Bank divides its operations into three segments: Retail Banking includes sales of products and services for individuals, such as current and deposit accounts, term deposits, granting of housing loans and cash loans, mortgage loans, revolving loans, overdrafts, issuing debit and credit cards, service of foreign cash transfers, entering into foreign exchange transactions, among others; Institutional Banking includes sales of products and services for enterprises, companies and cooperatives, individual entrepreneurs, individual farmers, non-profit institutions and public sector entities; and Financial Markets, Assets and Liabilities Management covers activity in the area of financial markets and liquidity management.
ING Bank Slaski is a bank holding company. Through its subsidiaries, Co. is engaged in providing a range of banking services rendered for individual and institutional clients in line with the scope of services outlined in Co.'s charter. Co. runs operations both in the home currency and in foreign currencies. Co. is also active on the domestic and foreign financial markets. The subsidiary, ING Bank Hipoteczny S.A., also runs banking business, including loans secured with mortgage. Additionally through subsidiaries, Co. operates brokerage services, real estate, leasing of real estate and advisory and acts as a financial intermediary as well as provides other financial services.
Komercni banka is a universal banking group based in the Czech Republic. Co. is engaged in the provision of a range of financial services in retail, corporate and investment banking. Co.'s operating segments include: Retail Banking, the provision of products and services to individuals, such as among others building savings, pension insurance, overdrafts, credit card and personal loans and mortgages; Corporate Banking, the provision of products and services to corporate entities such as foreign currency and derivative products, syndicated and export financing, and guarantee transactions; and Investment Banking, which involves trading in financial instruments.
mBank is a provider of comprehensive corporate banking services in Poland. Co. and its subsidiaries make up the mBank Group which is engaged in offering financial services. Co.'s service offering includes a comprehensive financial offer tailored to the needs of corporate clients, Private Banking clients, and retail clients. The business activities of Co. is conducted in the following business segments: Retail Banking and Corporates and Markets.
PKO Bank Polski is a universal commercial bank offering services to both domestic and foreign retail, corporate and other clients. Co. is licensed to hold foreign exchange and currencies and sell/buy them, as well as perform a full range of foreign exchange services; open and hold bank accounts abroad and to deposit foreign exchange in these accounts. In addition, Co. conducts activities relating to leasing, factoring, electronic settlements via payment cards, as well as renders other financial services. As of Dec 31 2009, Co. had total assets of Zl156,478,685,000 and total deposit of Zl124,628,562,000. Co. operates in the Republic of Poland, Ukraine and Sweden.
Bank Zachodni is a bank seated in Poland. Co. and its subsidiaries provide a range of banking services for individual and business customers and operate in domestic and interbank foreign markets. Additionally, Co. provides also the following services, including intermediation in trading securities, leasing, factoring, asset/ fund management, insurance services, trading in stock and shares of commercial companies, and brokerage activity. Operational activity of Co. and its subsidiaries has been divided into five segments: Retail Banking, Business and Corporate Banking, Global Banking and Markets, ALM (Assets and Liabilities Management) and Centre, as well as Santander Consumer.
Rapidly growing CEE brokerage with over 50 stocks under coverage across CEE4 countries: Poland, Czechia, Hungary, Romania.
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