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Bank Handlowy SELL - Hit me baby one more time - IPOPEMA

Hit me baby one more time
After Bank Handlowy published detailed 1Q17 financial statement we think we have
more clarity what was the reason behind weak result on financial instruments and
revaluations. We think it could not be one time accident and lower profits in this line
can hit Handlowy’s P&L also in the quarters to come. As a result we cut out TP from
PLN 68.4 to PLN 65.1 and continue to recommend selling the stock seeing 13%
downside potential.
There are times when you make money and when you do not lose it - now it is
time for Handlowy to prepare to not to lose money
There are two items which influence result on financial instrument and revaluations.
The first is FX result. According to bank FX volumes improved in the first quarter by
2% qoq and 12% yoy thus we assume it could not account for negative surprise. The
second is result on financial instruments valued through P&L, which should reflect, at
least in part, bank’s expectations on interest rates development. Handlowy expects
increase in interest rates in Poland, thus is now conducing “risk-off” strategy and
adjusts its securities portfolio to make it less exposed to negative consequences of
such scenario. As a result we think it caused losses recognized in 1Q17. Process of
adjusting the portfolio will be continued in our view and will keep other income line
depressed as long as assumed scenario will not start to materialize.
The most expensive bank, consensus will be downgraded
We cut our 2017E net profit forecast from PLN 561m to PLN 507m (-16% yoy), which
is still 14% below market consensus of PLN 592m. Given weak 1Q17 and rather
small chance for material improvement on core business we expect consensus will
adjust in the months to come as well. To reach the consensus bank would need to
deliver c. PLN 183m per each next quarter. Even if we adjust 1Q17 figures by c. PLN
61m of BFG fess and c. PLN 10m of one-off costs of risk we still do not find reasons
for consensus to be so optimistic.
Handlowy is the most expensive Polish bank with P/E ratio of 19.3x for this year,
which is 17% premium to median in our banking coverage universe. As a result DY
for next year is 5.2%, which is not enough compensation for bank which pays full
profits on dividend in our view. Handlowy trades with significant premium to its book
value (P/BV’17E = 1.5x), while its ROE is only 7.5% for this year and 8.2% for 2018E.