ING BSK – More Downside Ahead

A coronavirus recession is looming, and so we are compelled to adjust the earnings expectations for our Polish banking universe to a new economic reality, with the aggregate FY2020-2021 forecasts revised 44% and 32%, respectively, lower. A base-case scenario adopted by us assumes that the current state-mandated quarantine measures will remain in place until mid-May, and each month over the base-case period will warrant a new revision. There is no historical precedent for simultaneous, pandemic-induced, shocks to both supply and demand to help us assess the potential negative impacts on the banking sector. The single biggest factor that we can identify, which accounts for the bulk of the changes to our models, is an assumed doubling of risk costs to 155bp (+PLN 6.5bn in 2020) – a forecast which pessimists might consider too low, but which is backed by the wide range of emergency measures implemented by both Polish and European regulators and industry stakeholders. Under their guidance, banks have been given more flexibility in creating loan loss provisions under relief debt moratoria agreements, and have been offered incentives to help crisis-struck businesses to stay afloat. However the greater supervisory tolerance for provisioning flexibility probably has an expiration date – that is why it would be so important to know how long the current lockdown will last. Another major adjustment, which prompted a further PLN 1bn cut to our aggregate earnings estimate for FY2020, is the 50bp March 17th cut in the NBP's benchmark interest rate. When it comes to capital adequacy, however, it is worth pointing out that the standing of Polish banks is much more comfortable today (with TCR of 19%) than it was in 2008 (TCR=11%). The WIG-Banks  lost 25% of its capitalization in the span of two weeks after being sent into an uncertainty-fueled tailspin, but we still see compelling opportunities in the sector, even in our conservative  base-case scenario. In order to give a range of possible outputs in the face of extreme uncertainty and volatility, we also opt to provide best- and worst-case scenarios for the banking sector based on each bank's perceived sensitivity to risk costs and rate cuts.