POLISH BANKING SECTOR
A STEP BACK?
• Bank earnings in 2009 will shrink by one-third on slower volumes, a weakening
economy, and an uncertain albeit stabilizing situation in the interbank market. A
return to income levels recorded in 2008 (we predict an industry net-income total
of PLN 15-16 billion) will not be possible before 2011. Lower earnings and a push
toward reinforcing equity (we expect most banks to retain earnings this year) will
bring ROE down from 21% to 12%- 13% in 2009 and 2010. While larger banks
with liquid balance sheets and low cost-to-income ratios are able to keep their
ROEs higher and above their COEs, the ROEs of smaller banks will remain in the
single digits. This outlook is already factored in stock prices. Based on our target
prices, we forecast that the WIG Banki sector index will increase about 15
percent in 2009, driven mainly by PKO BP which will be responsible for 8-9
percentage points of the gain. Overall, large banks will offer more attractive
returns, and, without them, the bank sector will underperform broad market
indices. We have buy ratings on PKO BP and BZ WBK, and an accumulate rating
on Pekao, all of which we expect to retain the highest ROE, maintain the ratios of
loans to deposits below 100%, and keep costincome ratios low thanks to scale
effects. Our other sector bets are Bank Handlowy (accumulate) and Noble Bank
(buy). The former is likely to pay dividends, while the latter is very attractively
priced relative to the sector (a 49% discount to FY08E earnings and a 25%
discount to FY09E earnings), and more than compensates for the heightened risk
of investment in a small privately-held bank. We give a hold rating on ING BSK
whose current price already factors in a liquid balance sheet, strong presence in
retail deposits, and conservative management, and whose high cost-to-income
ratio and exposure to corporate loans constitute risk factors. We also recommend
to hold Millennium, whose share price already reflects the expected downturn in
earnings which is not expected to be remedied any time soon. Finally, we give a
sell rating on Kredyt Bank, whose ratio of loans to deposits hovers around 100%,
and which has significant exposure to foreign-currency mortgage risks and a high
cost-to-income ratio.
• The bank industry faces a significant slowdown in volumes; we predict that loans
in 2009 will expand 6%, with deposits rising 6.5%. Such rapid deceleration (the
industry's combined loan portfolio surged by an estimated PLN 125bn in 2008,
compared to an expected increase by PLN 35bn in 2009) is caused by two
factors: shortage of liquidity in financial markets, and tightening of lending
requirements by banks in anticipation of an economic cooling. The global turmoil
experienced by financial markets has left banks with virtually no interbank
financing options except for short-term and expensive credit. The situation is
going to gradually improve throughout 2009, but costs of financing are not likely
to pull back to the level seen in early 2008.
• A weakened economy is going to affect the quality of bank loan receivables. As a
result, the ratio of non-performing loans to total loans will increase from 4.4% at
December 2008 to en estimated 6.1% in 2009 and 7.6% in 2010. This will cause
banks to incur higher costs of risk, which we expect to reach 1.1%-1.2% in 2009
and 2010.