Swiss Franc Settlements And Tier 2 Issuance Will Secure Efficiency

Key Takeaways

• mBank's strategic expansion in loans and cost management enhances market share and net margins, promising revenue growth with controlled expenses.
  
• Settlement focus and investment-grade ratings reduce legal risks and borrowing costs, supporting sustainable growth and earnings stability.
  
• Rising operational costs, regulatory uncertainty, and legal risks could impact mBank's net margins, financial stability, and earnings.

Catalysts

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

• mBank continues to expand in both retail and corporate segments, growing its core loans by 9% year-over-year, which could lead to increased revenue through larger market share and enhanced customer base.
  
• The bank's improved cost-to-income ratio, currently below 30%, demonstrates efficiency and has the potential to enhance net margins by keeping operating costs in check relative to income.
  
• mBank's strategic focus on signing settlements for Swiss franc mortgage loans is reducing legal risks, paving the way for potentially higher net margins and decreased risk-related expenses.
  
• The agency rating upgrades to investment grade improve the bank's borrowing costs and capital access, potentially boosting profitability and earnings stability in the long run.
  
• Plans to issue Tier 2 capital and a focus on maintaining capital buffers above minimum requirements provide a strong foundation for sustainable future growth, supporting higher earnings through strategic reinvestment.

mBank Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming mBank's revenue will grow by 1.6% annually over the next 3 years.
• Analysts assume that profit margins will increase from 23.1% today to 37.0% in 3 years time.
• Analysts expect earnings to reach PLN 4.5 billion (and earnings per share of PLN 105.15) by about July 2028, up from PLN 2.7 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 10.0x on those 2028 earnings, down from 13.4x today. This future PE is greater than the current PE for the GB Banks industry at 9.8x.
• 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 10.37%, as per the Simply Wall St company report.

mBank Future Earnings Per Share Growth

Risks

• mBank's revenue showed a slight quarter-over-quarter decline, attributed to nonbusiness factors such as shorter interest periods, which may signal future volatility in periodic revenues.
  
• Total costs, excluding compulsory contributions, grew by 9.5% year-over-year due to increasing employment and project-related expenses, which may pressure future net margins.
  
• The anticipated double-digit growth in expenses driven by new initiatives, wage increases, and regulatory contributions could impact net earnings due to rising operational costs.
  
• The cost of legal risk related to loans indexed to foreign currencies remains significant at PLN 662 million in Q1, posing a risk to future earnings if legal problems persist.
  
• Regulatory uncertainty, especially related to CRR 3 implementation and other changes, could increase risk-weighted assets and impact capital requirements, potentially affecting the bank's financial stability and earnings.

Valuation

• The analysts have a consensus price target of PLN794.5 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 PLN914.0, and the most bearish reporting a price target of just PLN626.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be PLN12.2 billion, earnings will come to PLN4.5 billion, and it would be trading on a PE ratio of 10.0x, assuming you use a discount rate of 10.4%.
• Given the current share price of PLN848.8, the analyst price target of PLN794.5 is 6.8% 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.