Enhanced PFM Services And Innovative Capital Strategies Will Significantly Boost Revenue And Net Margins

Key Takeaways

• Expansion in client reach and PFM functionalities aims to boost revenue and improve customer retention, enhancing net margins.
  
• Addressing Swiss franc legacy issues and growing the loan portfolio seeks to reduce uncertainty and support revenue growth.
  
• mBank faces profitability pressures from Swiss franc provisions, regulatory shifts, and anticipated interest rate cuts, while macroeconomic factors and inflation challenge revenue growth.

Catalysts

Provides various banking and financial services in Poland, the Czech Republic, Slovakia, and internationally.

• mBank's strategic development of its platform to reach 5,000 clients with 1.5 million products by Christmas 2024 could significantly boost revenue, driven by enhanced customer engagement and service offerings.
  
• The expansion of personal financial management (PFM) functionalities and increasing user adoption to 1.9 million users may lead to improved customer retention and service revenues, contributing to higher net margins.
  
• Accelerating the resolution of Swiss franc legacy issues, including a decline in new court cases and settlements outpacing pending cases, could reduce legal and financial uncertainty, positively impacting net margins and future earnings.
  
• Expected growth in the loan portfolio, particularly in retail and corporate segments, at rates higher than the market could lead to increased interest income, supporting revenue growth and maintaining stable net margins.
  
• Exploration of innovative capital market tools like the planned additional Tier 1 transaction, which is set to mobilize local capital markets, could enhance the capital base and support long-term earnings growth while maintaining comfortable capital ratio levels.

mBank Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming mBank's revenue will decrease by 0.9% annually over the next 3 years.
• Analysts assume that profit margins will increase from 11.1% today to 35.1% in 3 years time.
• Analysts expect earnings to reach PLN 4.0 billion (and earnings per share of PLN 94.45) by about December 2027, up from PLN 1.2 billion today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 9.5x on those 2027 earnings, down from 18.6x today. This future PE is lower than the current PE for the GB Banks industry at 12.9x.
• 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 9.7%, as per the Simply Wall St company report.

mBank Future Earnings Per Share Growth

Risks

• mBank is facing significant challenges related to its Swiss franc mortgages, with large provisioning requirements affecting profitability. Although the number of new court cases is declining, the existing provisions are substantial, impacting net margins and earnings.
  
• The expected decrease in net interest income in 2025 due to anticipated interest rate cuts could negatively affect revenue, even though there are attempts to offset this through new products and services.
  
• Regulatory changes are expected to increase risk-weighted assets (RWA) by 6% and potentially impact capital ratios, which could constrain growth opportunities and affect financial stability.
  
• Cost growth driven by inflation, as well as new initiatives, could increase the cost/income ratio, thereby pressuring net margins and possibly impacting earnings despite current strategies to keep the ratio below 40%.
  
• Macroeconomic factors such as stagnant consumer sentiment and slower real wage growth in Poland may limit domestic consumption, potentially impacting revenue growth prospects. Additionally, exchange rate fluctuations could present further risks to financial performance.

Valuation

• The analysts have a consensus price target of PLN 687.98 for mBank 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 PLN 784.0, and the most bearish reporting a price target of just PLN 568.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be PLN 11.4 billion, earnings will come to PLN 4.0 billion, and it would be trading on a PE ratio of 9.5x, assuming you use a discount rate of 9.7%.
• Given the current share price of PLN 542.0, the analyst's price target of PLN 687.98 is 21.2% higher.
• 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.