Rising Costs And Stable Rates Will Pressure Margins Yet Long Term Earnings Remain Resilient

Catalysts

About ING Bank Slaski

ING Bank Slaski is a universal bank in Poland focused on stable, predictable growth in retail and corporate banking, supported by strong digital and risk management capabilities.

What are the underlying business or industry changes driving this perspective?

• Although the bank is expanding its retail customer base and delivering strong mortgage volume growth, the expected absence of further interest rate cuts until 2026 limits scope for positive repricing. This may cap net interest income and compress margins as funding volumes rise faster than spreads.
• Despite rapid growth in mutual funds and fee generating capital market products, a potential normalization of net flows and increased competition for asset gathering could slow commission income growth. This would put a ceiling on revenue diversification and earnings momentum.
• While digital distribution and a high share of online lending lower unit costs and support scalable growth, rising IT and personnel expenses tied to technology and regulatory requirements may largely offset efficiency gains. This would constrain future improvements in the cost to income ratio and net margins.
• Although mortgage and retail loan quality remains very strong with low cost of risk, the structurally weaker corporate environment and higher nonperforming loan share in that segment increase the likelihood that any macro slowdown or regulatory tightening will push up provisioning needs, weighing on earnings growth.
• While a growing role of T bonds and securities helps stabilize interest margin and deploy excess deposits, an extended period of subdued private sector investment and weak corporate loan demand would keep the balance sheet more heavily skewed to lower yielding assets. This would limit revenue growth and return on equity.

Assumptions

This narrative explores a more pessimistic perspective on ING Bank Slaski compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts. How have these above catalysts been quantified?

• The bearish analysts are assuming ING Bank Slaski's revenue will grow by 5.1% annually over the next 3 years.
• The bearish analysts assume that profit margins will shrink from 41.9% today to 31.1% in 3 years time.
• The bearish analysts expect earnings to reach PLN 3.9 billion (and earnings per share of PLN 32.23) by about December 2028, down from PLN 4.6 billion today. However, there is some disagreement amongst the analysts with the more bullish ones expecting earnings as high as PLN4.7 billion.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 14.4x on those 2028 earnings, up from 9.6x today. This future PE is greater than the current PE for the GB Banks industry at 9.4x.
• The bearish 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 10.7%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• Persistent growth in active retail and corporate customers, combined with strong momentum in mortgages where ING Bank Slaski holds an 18% share of new sales and 46% year on year growth, could drive higher than expected loan volumes and fee income, supporting sustained expansion in revenue and earnings rather than a flat share price.
• The 33% year on year increase in mutual fund assets, mostly driven by net inflows, and double digit growth in capital markets related fees may signal a durable shift toward higher margin commission and investment products, which could structurally lift non interest income, improve net margins and underpin long term earnings growth.
• Disciplined pricing on low margin corporate lending, a stable cost of funding at around 2.03%, and effective macro cash flow hedging that stabilizes the 3.15% interest margin may allow the bank to protect profitability through the rate cycle, supporting higher return on equity and potentially a re rating of the share price above current levels.
• Very low cost of risk in retail, improving risk metrics in corporate banking, and strong provisioning coverage above 50% indicate a resilient credit profile that could keep impairment charges subdued over time, which would support stronger net income and earnings stability than assumed in a flat share price scenario.
• Robust capital adequacy ratios with additional Tier 2 capital pending approval, combined with a track record of predictable results and potential positive effects from deferred tax revaluation after a CIT increase, could enable attractive and possibly rising dividends, enhancing total shareholder returns and creating upside pressure on the share price through improved earnings and capital management.

Valuation

How have all the factors above been brought together to estimate a fair value?

• The assumed bearish price target for ING Bank Slaski is PLN321.95, which represents up to two standard deviations below the consensus price target of PLN369.52. This valuation is based on what can be assumed as the expectations of ING Bank Slaski's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of PLN470.0, and the most bearish reporting a price target of just PLN321.95.
  
• In order for you to agree with the more bearish analyst cohort, you'd need to believe that by 2028, revenues will be PLN12.6 billion, earnings will come to PLN3.9 billion, and it would be trading on a PE ratio of 14.4x, assuming you use a discount rate of 10.7%.
  
• Given the current share price of PLN335.5, the analyst price target of PLN321.95 is 4.2% 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.