Global Bank Equity Specialist, Creative Portfolios

Paul Hollingworth

Global Bank Equity Specialist

Creative Portfolios

Equity Bottom-Up

While we have been cautious on Polish banks for some time now given structural issues related to “National Policy” and legacy assets as well as decreasing Profitability, recently we have identified Pekao, a relatively lower risk asset versus its Polish counterparts within our VFM model. VFM expresses an asset according to its value-quality characteristics (PH Score™), above average in the case of Pekao, its technical picture, which is relatively depressed, and an additional valuation filter which shows cheapening in recent weeks.Shares in <a href="https://www.smartkarma.com/entities/bank-pekao-sa" target="_blank" data-smartkarma-citation="entities:25195:1" rel="noopener">Bank Pekao SA (PEO PW)</a> have underperformed since the release of somewhat disappointing Q320 numbers. True, there has been some erosion in variables such as core Profitability as seen in a lower PH Score™ vis-à-vis Q220. (The PH Score™ castigates a drop in Equity/Assets but does not reward a better CET1 and Total Capital Ratio). Our PH Score™ though shows that the bank is making headway on the Efficiency front which is a key variable. This helps the bank offset waning credit growth and some margin/spread erosion though NIMs are still above the danger zone of other European and APAC lenders such as Taiwan and Japan. Liquidity trends are also highly benign with Deposits climbing by 18% YoY, Debt/Equity declining, and much higher Liquidity Coverage and Net Stable Funding ratios. The top-line and Operating Income show flat growth versus moderate expansion at Q220LTM while “non-core Income” (at just 14.5% of PT Profit) partially offsets the impact of much higher credit costs on the bottom-line which may be partially reversed going forward. Comprehensive Income was well higher than Net Profit – a good sign. The fundamental picture appears reasonably favourable versus its peers and the underlying narrative remains quite compelling.The shares have cheapened in reaction to the latest earnings release. A FV of 7%, a PBV of 0.46x, and an Earnings Yield of 14.5% are not unattractive. They trade below common-sense thresholds of 10%, 1x, and 10%, respectively.

While we have been cautious on Polish banks for some time now given structural issues related to “National Policy” and legacy assets as well as decreasing Profitability, recently we have identified Pekao, a relatively lower risk asset versus its Polish counterparts within our VFM model. VFM expresses an asset according to its value-quality characteristics (PH Score™), above average in the case of Pekao, its technical picture, which is relatively depressed, and an additional valuation filter which shows cheapening in recent weeks.Shares in Bank Pekao SA (PEO PW) have underperformed since the release of somewhat disappointing Q320 numbers. True, there has been some erosion in variables such as core Profitability as seen in a lower PH Score™ vis-à-vis Q220. (The PH Score™ castigates a drop in Equity/Assets but does not reward a better CET1 and Total Capital Ratio). Our PH Score™ though shows that the bank is making headway on the Efficiency front which is a key variable. This helps the bank offset waning credit growth and some margin/spread erosion though NIMs are still above the danger zone of other European and APAC lenders such as Taiwan and Japan. Liquidity trends are also highly benign with Deposits climbing by 18% YoY, Debt/Equity declining, and much higher Liquidity Coverage and Net Stable Funding ratios. The top-line and Operating Income show flat growth versus moderate expansion at Q220LTM while “non-core Income” (at just 14.5% of PT Profit) partially offsets the impact of much higher credit costs on the bottom-line which may be partially reversed going forward. Comprehensive Income was well higher than Net Profit – a good sign. The fundamental picture appears reasonably favourable versus its peers and the underlying narrative remains quite compelling.The shares have cheapened in reaction to the latest earnings release. A FV of 7%, a PBV of 0.46x, and an Earnings Yield of 14.5% are not unattractive. They trade below common-sense thresholds of 10%, 1x, and 10%, respectively.  

Bank Pekao: Cheapening on the Back of Solid Results