Bank Plans To Expand Mortgage Lending And Digital Channels, But Legal Challenges And Cost Pressures May Hinder Future Earnings

Key Takeaways

• Expanding mortgage lending, digital channels, and customer management aims to drive revenue and net margin growth amid a slower subsidy rollout.
  
• Risk reduction and strategic focus on high-growth segments like leasing and SME lending enhance earnings and net margins.
  
• Increased litigation risk, operational cost reassessment, and upcoming regulatory impacts could pressure Alior Bank's margins and revenue growth.

Catalysts

Provides banking products and services for individuals, businesses, and enterprises in Poland.

• Alior Bank's plans to expand its mortgage lending faster than the market, especially as it anticipates the government's subsidy program will take time, is expected to drive future revenue growth.
  
• The bank's focus on leveraging its strong consumer lending foundation and expanding its customer base through digital channels and enhanced customer relationship management is aimed at increasing both net margins and revenue.
  
• Alior Bank's improvement in risk parameters, notably the reduction of its non-performing loans (NPL) ratio, is likely to positively impact net margins and earnings through decreased risk costs.
  
• The bank's intention to maintain a high net interest margin and actively manage financing costs is expected to sustain or potentially increase its net interest income, contributing to improved earnings.
  
• Alior Bank's strategy to focus on high-growth segments, such as Alior Leasing and SME lending, along with plans to optimize costs in alignment with inflation and regulatory changes, is expected to enhance net margin and overall earnings stability.

Alior Bank Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Alior Bank's revenue will grow by 2.6% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 43.2% today to 34.7% in 3 years time.
• Analysts expect earnings to reach PLN 2.1 billion (and earnings per share of PLN 14.8) by about March 2028, down from PLN 2.4 billion today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 9.6x on those 2028 earnings, up from 5.1x today. This future PE is lower than the current PE for the GB Banks industry at 9.9x.
• Analysts expect the number of shares outstanding to remain consistent over the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 10.18%, as per the Simply Wall St company report.

Alior Bank Future Earnings Per Share Growth

Risks

• The slowdown in the growth of the lending portfolio, which was nearly PLN 1 billion in Q4 despite record transactions with customers, indicates potential future challenges in revenue generation.
  
• The risk of increased litigation regarding free loans, despite the current strategy modifications, could lead to significant legal costs and impact net margins.
  
• The variability in commission income and the low growth in the business customer segment might affect Alior Bank's ability to maintain or grow net margins.
  
• Potential impact of upcoming regulations like Basel IV on capital requirements may pressure earnings if not managed well.
  
• Reassessing larger operating costs, particularly with inflation growth and BFG contributions, could limit net income improvement.

Valuation

• The analysts have a consensus price target of PLN116.314 for Alior Bank based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of PLN126.5, and the most bearish reporting a price target of just PLN96.7.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be PLN6.1 billion, earnings will come to PLN2.1 billion, and it would be trading on a PE ratio of 9.6x, assuming you use a discount rate of 10.2%.
  
• Given the current share price of PLN96.32, the analyst price target of PLN116.31 is 17.2% higher. Despite analysts expecting the underlying buisness to decline, they seem to believe it's more valuable than what the market thinks.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.