Profit Margins Will Decline Amid Rising Costs And Net Interest Income Pressure

Key Takeaways

• Slowing revenue growth in consumer banking and net interest income pressures may compress future margins and impact overall profitability.
  
• Increased regulatory and IT expenses alongside reliance on institutional banking pose risks to growth amid potential macroeconomic shifts.
  
• Strong institutional banking growth, improved trade finance and FX, robust consumer banking trends, and efficient cost management indicate potential revenue and shareholder value gain.

Catalysts

Provides a range of commercial banking services for individual and corporate clients in Poland and internationally.

• There may be an expectation of slowing revenue growth in the consumer banking sector, as the lending portfolio in this segment showed flattish growth (1% year-over-year decline) despite high rates and positive dynamics in the mortgage portfolio. This slowdown in the consumer banking sector could affect future revenue growth.
  
• The pressure on net interest income (NII), evidenced by a 3% decline quarter-over-quarter, and heightened cost of deposits in wealthy segments may indicate future net margin compression, impacting the bank's profitability.
  
• Investor concerns may stem from increased regulatory and IT project expenses that contributed to a 7% increase in overall expenses. While this was below the sector average, ongoing regulatory and project expenses could pose a risk to net margins through higher cost structures.
  
• The expected stabilization of NII tied to rates forecasts suggests limited growth potential in net interest margins, potentially slowing overall earnings growth as current rates are factored into forward projections.
  
• Although institutional banking is an area of strong performance, dependence on successfully executing investment banking transactions and maintaining custody fee growth carry risks if macroeconomic conditions or client sentiment shift, which could affect revenue stability.

Bank Handlowy w Warszawie Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Bank Handlowy w Warszawie's revenue will decrease by 2.4% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 39.4% today to 38.3% in 3 years time.
• Analysts expect earnings to reach PLN 1.6 billion (and earnings per share of PLN 11.48) by about March 2028, down from PLN 1.8 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 11.4x on those 2028 earnings, up from 8.5x today. This future PE is greater than the current PE for the GB Banks industry at 10.0x.
• 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 8.62%, as per the Simply Wall St company report.

Bank Handlowy w Warszawie Future Earnings Per Share Growth

Risks

• The institutional banking side recorded an 8% year-over-year growth in lending, indicating strong client activity and potential for continued revenue growth.
  
• Strong performance in trade finance and FX volumes, with a 58% year-over-year growth in trade finance transactions and 4% in FX volume, is likely to bolster revenue.
  
• A healthy capital position and a TLAC TREA ratio of 24.4% suggest financial stability, which may positively impact earnings and investor confidence.
  
• Positive trends in consumer banking, particularly in wealth management, with a 5% increase in deposit portfolio and investment sales up 66%, suggest potential for increased margins and revenue.
  
• The bank's strategy to maintain an efficiency ratio below 45% and pay out at least 75% of net income as dividends indicates strong cost management and shareholder value focus, potentially supporting net margins.

Valuation

• The analysts have a consensus price target of PLN108.967 for Bank Handlowy w Warszawie 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 PLN131.0, and the most bearish reporting a price target of just PLN91.8.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be PLN4.2 billion, earnings will come to PLN1.6 billion, and it would be trading on a PE ratio of 11.4x, assuming you use a discount rate of 8.6%.
• Given the current share price of PLN114.8, the analyst price target of PLN108.97 is 5.4% lower. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
• 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.