Global Bank Equity Specialist, Creative Portfolios

Paul Hollingworth

Global Bank Equity Specialist

Creative Portfolios

Equity Bottom-Up

Powszechna Kasa Oszczednosci B / Equity Bottom-Up

LTM results at PKO may not look pretty given the hugely distorting effects of CHF mortgage provisioning. With 6.7 billion zlotys already set aside for potential settlements with Swiss franc mortgage holders, the lender's top managers recently said the bank currently has no plans to create additional loan loss provisions on its Swiss franc mortgage portfolio and would like to return to dividend payments as soon as possible, subject to the decision of Poland's Financial Supervision Authority. Including the aforementioned provisions in OPEX, as our data supplier does, generates very poor Efficiency ratios. Stripping these out of OPEX shows a bank making gradual improvements on the Efficiency front. This means that rather than scoring “0” on Efficiency, the bank should perhaps score a “1.1” in our binary PH Score™ model. If we were to do this, PKO would score 3.3 rather than 2.2. Either way, this is a subpar outcome given the deterioration, not helped by the provisions, in Profitability as well erosion in Common Equity/Assets (though not all Capitalisation ratios), in NIM/Spread, and in Asset Quality. Provisioning was better though while Liquidity improved on account of reining back credit provision. Stripping out CHF provisions, PT Profit was some 8% lower YoY which is reasonable given the C-19 backdrop though underlying Profitability revealed a downward trajectory given Asset growth (accumulation of debt instruments).PKO specialises in consumer credit (61% of Loans), mainly mortgages, though the bank has a (receding) corporate credit book (39%), backed by transactional account funding (84% of Deposits). Under Zbigniew Jagielło's respected tenure, <span title="" data-toggle="tooltip" data-offset="10%" data-trigger="manual" data-html="true" data-container="body" data-template='&lt;div class="tooltip" role="tooltip"&gt;&lt;div class="news-article-tooltip-arrow tooltip-arrow"&gt;&lt;/div&gt;&lt;div class="tooltip-inner"&gt;&lt;/div&gt;&lt;/div&gt;' data-original-title="">PKO made a string of acquisitions and more than doubled its asset size, but the CEO's surprise resignation has raised questions about whether Poland's largest bank will face growing political interference. PKO has been a state-controlled financial institution since its inception. But Poland's ruling party PiS has, since coming to power in 2015, <span title="" data-toggle="tooltip" data-offset="10%" data-trigger="manual" data-html="true" data-container="body" data-template='&lt;div class="tooltip" role="tooltip"&gt;&lt;div class="news-article-tooltip-arrow tooltip-arrow"&gt;&lt;/div&gt;&lt;div class="tooltip-inner"&gt;&lt;/div&gt;&lt;/div&gt;' data-original-title="">intensified efforts to increase state control of the financial sector. The "redomestication" of banks promises greater national autonomy though in reality the participation of government has also led to concerns by investors that banks might be used to finance unprofitable entities or sectors. Jagiełło's leadership of PKO over the last 12 years has been seen by the market as a sign of stability, and helped reposition it as a modern, digital financial institution and strengthen its leading position in the banking sector. During his tenure, the bank's assets increased from less than €40 billion in 2009 to more than €80 billion in 2020. It strengthened its position in various markets via M&amp;A, including the purchase of Nordea’s Polish banking and insurance units, the Polish leasing operation at Raiffeisen, and the Polish asset management at KBC while branches were opened in Germany, the Czech Republic, and Slovakia<div class="content-highlight">A FV of 19% and a PBV of 1.2x are not attractive given the respective thresholds of 10% and 1.0x. The bank commands subpar fundamental momentum despite the headline CIR and lack of Profitability being more optical than real within a low PH Score™. Management autonomy generates uncertainty and is a risk moving forward.</div>

LTM results at PKO may not look pretty given the hugely distorting effects of CHF mortgage provisioning. With 6.7 billion zlotys already set aside for potential settlements with Swiss franc mortgage holders, the lender's top managers recently said the bank currently has no plans to create additional loan loss provisions on its Swiss franc mortgage portfolio and would like to return to dividend payments as soon as possible, subject to the decision of Poland's Financial Supervision Authority. Including the aforementioned provisions in OPEX, as our data supplier does, generates very poor Efficiency ratios. Stripping these out of OPEX shows a bank making gradual improvements on the Efficiency front. This means that rather than scoring “0” on Efficiency, the bank should perhaps score a “1.1” in our binary PH Score™ model. If we were to do this, PKO would score 3.3 rather than 2.2. Either way, this is a subpar outcome given the deterioration, not helped by the provisions, in Profitability as well erosion in Common Equity/Assets (though not all Capitalisation ratios), in NIM/Spread, and in Asset Quality. Provisioning was better though while Liquidity improved on account of reining back credit provision. Stripping out CHF provisions, PT Profit was some 8% lower YoY which is reasonable given the C-19 backdrop though underlying Profitability revealed a downward trajectory given Asset growth (accumulation of debt instruments).PKO specialises in consumer credit (61% of Loans), mainly mortgages, though the bank has a (receding) corporate credit book (39%), backed by transactional account funding (84% of Deposits). Under Zbigniew Jagielło's respected tenure, PKO made a string of acquisitions and more than doubled its asset size, but the CEO's surprise resignation has raised questions about whether Poland's largest bank will face growing political interference. PKO has been a state-controlled financial institution since its inception. But Poland's ruling party PiS has, since coming to power in 2015, intensified efforts to increase state control of the financial sector. The "redomestication" of banks promises greater national autonomy though in reality the participation of government has also led to concerns by investors that banks might be used to finance unprofitable entities or sectors. Jagiełło's leadership of PKO over the last 12 years has been seen by the market as a sign of stability, and helped reposition it as a modern, digital financial institution and strengthen its leading position in the banking sector. During his tenure, the bank's assets increased from less than €40 billion in 2009 to more than €80 billion in 2020. It strengthened its position in various markets via M&amp;A, including the purchase of Nordea’s Polish banking and insurance units, the Polish leasing operation at Raiffeisen, and the Polish asset management at KBC while branches were opened in Germany, the Czech Republic, and SlovakiaA FV of 19% and a PBV of 1.2x are not attractive given the respective thresholds of 10% and 1.0x. The bank commands subpar fundamental momentum despite the headline CIR and lack of Profitability being more optical than real within a low PH Score™. Management autonomy generates uncertainty and is a risk moving forward.

PKO: Not as Bad as It Looks but Still Unappealing