Global Bank Equity Specialist, Creative Portfolios

Paul Hollingworth

Global Bank Equity Specialist

Creative Portfolios

Equity Bottom-Up

Bank Handlowy w Warszawie SA / 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 identified Bank Handlowy, within our VFM model as a potentially interesting share to evaluate. VFM expresses an asset according to its value-quality characteristics (PH Score™), well above average in the case of Handlowy, its technical picture, and an additional filter which shows a reasonable (though not bargain basement) valuation.While the PH Score™ is undeniably favorable, we are mindful of what lies behind such a strong Score, in this case in the top quartile globally. We are cautious about underlying Efficiencies at the bank, which do not show up in the headline CIR, especially when Trading gains are stripped out. The weight of Trading gains within Pre-Tax Profit also instils caution regarding Earnings Quality. The picture which emerges is of a PH Score™ impacted positively by Trading gains and lower LLPs rather than by “Core Income”. Given the depressed credit impulse, as in the US, Liquidity continues to improve. In fact, excess Liquidity can be seen in the proportion of Assets dedicated to Liquid Assets. Capitalisation continues to strengthen, as does Provisioning given the mild erosion in Asset Quality. Profitability improvements, underpinned by Trading gains and lower Credit Costs despite some deterioration in Asset Quality, rather than by credit intermediation, by margin and spread, and by real Efficiencies, is the key takeaway behind optical fundamental progression and the strong PH Score™. We are thus left in a position, swayed one way by a model and left unimpressed by a deeper dive. In conclusion, we side with our deeper dive though we accept that Handlowy’s Balance Sheet appears in better shape than in the past while the Income Statement is hugely flattered by lower quality items.   A FV of 13%, a PBV of 0.73x, and an Earnings Yield of 9.9% are not unattractive. They trade below or around common-sense thresholds of 10%, 1x, and 10%, respectively. Bank Handlowy dedicates itself mainly to corporate credit (68.5% of Loan book), and to a lesser extent to consumer credit (31.5% of Loans) backed primarily by transaction accounts (85.4% of Deposits).

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 identified Bank Handlowy, within our VFM model as a potentially interesting share to evaluate. VFM expresses an asset according to its value-quality characteristics (PH Score™), well above average in the case of Handlowy, its technical picture, and an additional filter which shows a reasonable (though not bargain basement) valuation.While the PH Score™ is undeniably favorable, we are mindful of what lies behind such a strong Score, in this case in the top quartile globally. We are cautious about underlying Efficiencies at the bank, which do not show up in the headline CIR, especially when Trading gains are stripped out. The weight of Trading gains within Pre-Tax Profit also instils caution regarding Earnings Quality. The picture which emerges is of a PH Score™ impacted positively by Trading gains and lower LLPs rather than by “Core Income”. Given the depressed credit impulse, as in the US, Liquidity continues to improve. In fact, excess Liquidity can be seen in the proportion of Assets dedicated to Liquid Assets. Capitalisation continues to strengthen, as does Provisioning given the mild erosion in Asset Quality. Profitability improvements, underpinned by Trading gains and lower Credit Costs despite some deterioration in Asset Quality, rather than by credit intermediation, by margin and spread, and by real Efficiencies, is the key takeaway behind optical fundamental progression and the strong PH Score™. We are thus left in a position, swayed one way by a model and left unimpressed by a deeper dive. In conclusion, we side with our deeper dive though we accept that Handlowy’s Balance Sheet appears in better shape than in the past while the Income Statement is hugely flattered by lower quality items.   A FV of 13%, a PBV of 0.73x, and an Earnings Yield of 9.9% are not unattractive. They trade below or around common-sense thresholds of 10%, 1x, and 10%, respectively. Bank Handlowy dedicates itself mainly to corporate credit (68.5% of Loan book), and to a lesser extent to consumer credit (31.5% of Loans) backed primarily by transaction accounts (85.4% of Deposits).

BHW: Mindful of What Lurks Behind a Strong PH Score™