CEE Banking 4Q 09 Previews

9 Februarie 2010

RAIFFEISEN BANK S.A.

Stable NII, lower trading income, seasonal cost effects, provisioning as question mark

Sector strategy

The strength of the CEE banks is that they have well survived the last December shock triggered by the Basel paper. Uncertainly on various items and discussion about a banking tax may weigh on the sector during 2010. Coming privatisations of PZU, Tauron, an IPO of Polkomtel and a further sale of PGE on the WSE as well as CSOB's IPO in Prague may lead to a short-term stock overhang. A similar effect can arise from the higher debt issuance as governments are struggling to refinance their budget deficits. On the positive side, we expect appreciating local currencies over the next 12 months – supported by GDP data and discussions around EUR adoption (currently it is Poland) – easing the pressure on the deposit fight. Our macro team is confident on interest rate hikes in PL and CZ and on the further minimum reserve cuts in RO. In other words, we are optimistic on the mid-term fundamentals but cannot rule out further market weakness in the short term (Hungarian elections, PIGS spill-over effect).

2010 Earnings outlook

Some banks, especially in Poland, are quite bullish insofar as they make their official guidance (Getin 20% RoE for 2010, Millennium 15% for 2012; Handlowy 20% for 2012). We forecast an average RoE for the sector of 12.1% based on an improved risk outlook and an easy rebound of NIM (loan spreads coming down but deposit margins likely to grow). We see less room for largescale cost savings as the banks (most of them in our universe) are likely to catch up in lending and to re-start staff hiring. We expect an average profit growth of 49% and rank the banks with the highest profitability rebound starting with BRE, TLV, Getin, NKBM, BZ WBK, KB, OTP, BRD, Pekao, Erste and PKO.

Recommendation

Looking on 2011 multiples our most preferred stocks are Erste (valuation, revenues, risk outlook), BZ WBK (revenues, real estate risks largely cleaned up) and Getin (valuation, earnings upgrade). We remain neutral on PKO (risky growth), Pekao (too defensive and expensive), Komercni, BRD (both on valuation) and TLV. Our less preferred stocks are OTP (Ukrainian loan book, Hungary) and NKBM (credit and acquisition risks). We have cut BRE from "buy" to "hold" on the 2010 outlook downgrade.

4Q 09 trading ideas

We expect positive surprises at BZ WBK and Erste, based on current consensus. Pekao, KB, BRD and NKBM are neutral. We remind that Getin might be good for positive and PKO for negative surprises, based on experience from the previous years. BRE may slightly disappoint even if the weak 4Q is well guided. For OTP the amount of precautionary provisioning in 4Q sacrificing the year-end budget is crucial.

Basel III impact

We see Polish banks (with the exception of BRE), Komercni, OTP and Romanian banks strong and able to withstand the worst case scenario - that would be the proposal as it stands now. At those banks we do not expect any capital undershooting, de-leveraging necessity or departure from the dividend. By contrast, at Erste, BRE and NKBM the management boards would have to find solutions to counterbalance the impact from the new capital definition (treatment of minority interests and hybrid Tier 1 capital). If it comes to the new Basel liquidity framework, retail/mortgage banks with long-term loans (PKO, Getin, OTP, BRD) look comparatively weaker than their peers.

 

CEE Banking

Basel III – a first assessment in our universe

Basel Committee has published two papers on the reconfiguration of banking regulation, one related to the capital framework and the other to the new liquidity framework. We give our first assessment on the presented proposal even if we believe that the Basel paper as such needs several adjustments. Here we point to the grandfathering solutions for already granted participation/hybrid instruments, the treatment of minority interests and the introduction of an adequate leverage ratio as well as capital buffers. At the end of 2010 – when the new Basel II framework should be established - we will see whether we are right. The implementation of the new framework should start at the end of 2012.

Capital (revised current capital framework)

The weakest capitalised banks would be additionally burdened by new regulation concerning the treatment of minorities and hybrid capital: Erste (minorities from BCR and Austrian savings banks, participation capital, hybrid), BRE (minorities) and NKBM (minorities, hybrid). In the case of BRE the current discussions with the KNF about the transformation of PLN 1 bn Tier 2 into Tier 1 would be only a temporary solution as the new framework would probably not allow this. Pekao, PKO, BZ WBK, Getin, Komercni and Romanian banks would be impacted only marginally as they do not have any hybrid Tier 1 instruments (Tier 1 at those banks equals core Tier 1) and just negligible minority interests in the consolidated companies.

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