Banks
Poland
WIG Banki Index
FY'10E P/E
FY'09E P/E 21.8
17.9
5046
At Jet Speed
As liquidity returns to financial markets, the cost of financing is
decreasing, which impacts not just the wholesale money market, but
also the banks’ willingness to acquire deposits at high prices. The
price war in this area is now over, but the sector will continue to feel
its impact for a while. Another important factor is the stronger zloty,
which boosts the loans/deposits ratio, improves capital adequacy,
reduces the share of F/X loans in overall portfolios and limits the
future risk of mortgage write-offs (LTV). The banks are simultaneously
curbing their lending business and benefiting from the expansion in
deposits. In addition, the macroeconomic situation is improving and
the leading indicators are climbing up. All these factors have
diametrically altered our outlook on the industry. We are closing the
“sell” recommendation for the small players. We believe that in the
current market environment, the risk of losses and excessive
financing costs has decreased. We believe that the current ROA of the
listed banks (which we forecast at 1.1% in FY09) does not reflect the
long-term potential of their assets. Within the next few years, the ROA
will increase to 1.8%, which entails a valuation of 2x BV for the
industry as a whole. With this multiple now at 1.6 on average, we are
upbeat towards the sector. We believe that the currently identifiable
factors make BZ WBK, ING BSK and Kredyt Bank the most attractive
investments. The market sees Pekao as one of leaders, even though it
will be able to beat its main competitor PKO BP this year. The current
valuation of Millennium already prices in an improvement in its
interest margin next year. We consider Bank Handlowy the least
attractive investment (ca. 12% premium on tangible equity and the
likelihood of net income deterioration this year).
Long-Term Return on Assets
The current valuation of the banks (’09 P/BV of 1.6) discounts a ROA of
1.4%. This is unjustified in the light of their current earnings. Our long-term
earnings projections entail an improvement in the ROA, driven by the
declining cost of risk and improved profitability in the upcoming years. For
FY2011, we forecast a ROA of 1.8%, which entails an ’09 P/BV multiple of
2. This means that the market has not yet fully discounted the banks’
potential stemming from their existing assets. Our scenario is based on the
assumption that the banks’ assets will expand at a moderate pace over the
next two years. If this happens faster, our outlook on the industry will
improve further.
Forecast Revision
We are increasing net income forecasts for the banks in our coverage
universe. We expect their aggregate net income to decline by 35% y/y (vs.
by 2/3 as previously assumed). At the same time, we expect volume growth
to decelerate somewhat less rapidly: despite the appreciation of the zloty
(CHF/PLN at 2.61 and EUR/PLN at 4.0 at the end of the year), total loans
will increase by 4.5%, and deposits by 6% (vs. +1% and +3% in our
previous forecasts). We assume that the costs of risk will reach 1.5% (vs.
2.2%), as loans turn out to be better secured than previously thought.
Risks for Our Scenario
The key risks for our scenario are (i) a return of the global financial markets
to the state of turmoil, (ii) short-lived nature of the economic rebound across
the world. The former factor is less likely to occur. In the latter case, the
danger lies in a low-level stagnation that might follow the expected rebound.
In this case, our high-earnings scenario (we assume a ROA of 1.8% already
in 2011) may be delayed by several years.