CEE Banks - Before MPC lets the rates off the lead - IPOPEMA
Before MPC lets the rates off the lead
The year 2017 has been much kinder to Polish banks than we had expected. CHF weakened significantly versus PLN, which made Polish legislators and politicians less prone to push for hard solutions to FX-denominated mortgage loans. So far, no painful measures have been adopted and only the presidential proposal is still theoretically on the table. Macroeconomic conditions favoured volumes and revenues growth and low cost of risks, while operating expenses remained under control during the year. Finally, the Polish regulator slightly loosened its hard stance towards dividends and allowed more banks to share profits with shareholders from 2018.
Fundamentals supportive for the year ahead
There does not seem to be that much to worry about from the point of view of fundamentals in Poland. The economic growth anticipated next year should allow for further volumes growth fuelled by PLN mortgages, with still solid dynamics in the consumer segment (and, hopefully, on the corporate side), which will be partially counterbalanced by the natural amortization of FX mortgages. Even so, 5% volumes growth can be expected. Revenues should follow business growth: NIM should improve slightly in 2018 versus 2017 even without a rate hike, while fees and commissions look set to post growth (but slower) due to higher card fees, better asset management (with some risk of management fees being capped), lower revenues from accounts, traditional transactions and potentially brokerage.
Polish banks are quite immune to wage pressure in the economy, while regulatory costs have already increased in recent years (e.g. banking tax, Bank Guarantee Fund) so we do not expect another wave of additional burdens. As a result, costs should grow close to the level of inflation. The only concern could be related to cost of risk. Despite the solid macro environment some Polish companies have experienced liquidity problems, while others have already filed for bankruptcy or restructuring. Polish banks sold a relatively high number of NPLs to debt collectors in 2017 and the value of these transactions could be lower in 2018. On top of this the introduction of IFRS 9 will also put some upward pressure on provisioning in the short term.
Dividends are back
The Polish regulator, after years of pushing banks to retain profits, finally loosened its requirements for dividend payments and around 40% of profits recorded by banks in 2017 will be shared with shareholders in 2018. In 2019, capital requirements will likely increase somewhat due to the higher conservation buffer (up 0.625%), but in any case the trajectory of dividends should be one of growth in the years ahead.
Still pricey, but look beyond 2018
It could be said that the multiples of Polish banks are elevated. But it is easy to find justification for this: the FX saga is no longer a major threat, and earnings are set to grow by 10% in 2018 and even faster in 2019, spurred on by higher interest rates. In our models we assumed 3 rate hikes, each 25 bps at the end of 2018 and beginning of 2019.
Alior remains our favourite name in the Polish banking sector as it has the highest leverage on interest-rate hikes and is still reasonably valued. PKO BP and Handlowy, another BUYs, are the banks to be when it comes to interest-rate hikes. We could also include BZ WBK and Pekao in this group, although their valuation multiples are not as attractive, thus they are rated as HOLD. We also add KomerÄní with a BUY recommendation, highlighting the attractive valuation, which we believe already anticipates weaker reported earnings in 2018 and growth in capital requirements in the Czech banking sector.
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.
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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