Reduced Legal Risks From Swiss Franc Loans Will Support Future Profitability

Key Takeaways

• Strategic focus on mortgage and corporate lending expansion is set to drive significant revenue growth and bolster net interest income.
  
• Strengthened capital position and reduced legal risks improve earnings resilience, while efficient cost management supports healthy net margins.
  
• Regulatory changes, legal costs, and rising operating expenses could pressure mBank's capital ratios, margins, and revenue amid an uncertain economic environment.

Catalysts

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

• mBank's strategic focus on expanding business volumes, particularly in mortgage and corporate lending, is expected to drive significant revenue growth in the future. This expansion in lending volumes should bolster the top line by increasing net interest income as loan portfolios grow.
  
• mBank has strengthened its capital position through innovative financial exercises such as securitization transactions and AT1 issuance, setting a solid financial base for sustainable growth. These measures are likely to positively impact the bank's overall earnings and provide resilience against regulatory pressures.
  
• The substantial reduction in legal risks associated with Swiss franc mortgage loans, through aggressive provisioning and settlements, should significantly reduce future expenses and improve net margins by lifting the ongoing drag legal risks pose on the earnings.
  
• The expected increase in net fees attributed to an expanding customer base and higher transactionality is likely to enhance non-interest income. As mBank continues to grow its client base and product transactions, this provides a forward-looking boost to revenue diversification and overall profitability.
  
• mBank's operational strategies, particularly in cost management where the cost/income ratio remains under 30%, highlight their efficient business model. Coupled with a low cost of risk anticipated in coming years, these factors should support healthy net margins and enhance the bottom line.

mBank Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming mBank's revenue will decrease by 0.1% annually over the next 3 years.
• Analysts assume that profit margins will increase from 19.3% today to 39.7% in 3 years time.
• Analysts expect earnings to reach PLN 4.6 billion (and earnings per share of PLN 108.66) by about March 2028, up from PLN 2.2 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 8.8x on those 2028 earnings, down from 14.0x 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 grow by 0.07% per year for 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.

mBank Future Earnings Per Share Growth

Risks

• Interest rate cuts in 2025 are likely, which may decrease net interest income, directly impacting revenue.
  
• New CRR/CRD regulatory changes are expected to increase risk-weighted assets by around 6.5%, potentially affecting capital ratios and earnings.
  
• Continued legal costs related to Swiss franc loans, even if reduced compared to past years, could still burden financial results and net profit.
  
• Operating costs are expected to increase due to inflation, new initiatives, and higher contributions to the resolution fund, potentially impacting net margins.
  
• Uncertain economic environment, even with expected rate cuts and growth, could impact consumer and corporate lending demand, affecting revenue growth.

Valuation

• The analysts have a consensus price target of PLN721.843 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 PLN785.0, 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 PLN11.6 billion, earnings will come to PLN4.6 billion, and it would be trading on a PE ratio of 8.8x, assuming you use a discount rate of 10.2%.
  
• Given the current share price of PLN740.0, the analyst price target of PLN721.84 is 2.5% 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.