Digital Adoption And Corporate Lending Will Drive Steady Long Term Performance

Catalysts

About Banco Comercial Português

Banco Comercial Português is a multinational banking group focused on retail and corporate banking with core operations in Portugal, Poland and Mozambique.

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

• The sustained expansion of the performing loan book in Portugal and the double digit corporate loan growth in Poland indicate structurally higher credit volumes that could support growth in net interest income and earnings over the next several years.
• The rapid adoption of mobile and digital channels, with mobile customers now representing most of the client base and driving higher transaction and sales activity, is likely to deepen customer engagement and lift fee and commission income while containing cost growth and supporting net margins.
• The strategic shift toward SME and corporate lending, backed by disciplined risk management and low cost of risk, positions the group to respond to investment needs in its core markets and may enhance asset yields and return on equity even as rates decline.
• The progressive normalization of legal and credit costs in Poland, particularly the shrinking FX mortgage portfolio and lower related provisions, could free up capital generation capacity and allow more of core operating profit growth to flow into bottom line earnings.
• The combination of capital ratios above regulatory minima and organic capital generation may provide room to finance balance sheet growth and potentially support higher shareholder distributions over time, contributing to book value per share growth and total shareholder returns.

Assumptions

How have these above catalysts been quantified?

• Analysts are assuming Banco Comercial Português's revenue will grow by 6.0% annually over the next 3 years.
• Analysts assume that profit margins will increase from 26.7% today to 31.0% in 3 years time.
• Analysts expect earnings to reach €1.3 billion (and earnings per share of €0.1) by about December 2028, up from €935.7 million today. However, there is some disagreement amongst the analysts with the more bullish ones expecting earnings as high as €1.6 billion.
• In order for the above numbers to justify the price target of the analysts, the company would need to trade at a PE ratio of 11.8x on those 2028 earnings, down from 13.8x today. This future PE is lower than the current PE for the GB Banks industry at 13.8x.
• Analysts expect the number of shares outstanding to decline by 2.05% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.62%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• A sharper or more prolonged decline in interest rates than management anticipates in both Portugal and Poland could compress net interest margins beyond the offset from mid single digit loan growth, which would undermine the assumed resilience of net interest income and put pressure on earnings.
• The strategy to rebalance toward SME and corporate lending in Portugal and Poland is capital intensive and inherently riskier than retail mortgages. An adverse turn in the European cycle or sector specific stress could push cost of risk above the guided 30 to 40 basis point range and erode net margins and return on equity.
• Regulatory and fiscal headwinds, including higher corporate tax rates and bank specific levies in Poland and any new forms of bank contributions or taxes in Portugal, may more than offset the planned tax cuts in Portugal. This would limit organic capital generation and constrain future profit growth and shareholder distributions.
• Persistent sovereign risk and political volatility in Mozambique, evidenced by heavy provisions against local sovereign debt, could become a recurring drag if the recovery is slower than the bank’s 2027 to 2028 normalization view. This would depress group earnings and dilute the contribution from higher growth core markets.

Valuation

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

• The analysts have a consensus price target of €0.88 for Banco Comercial Português 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 €0.98, and the most bearish reporting a price target of just €0.75.
  
• In order for you to agree with the analysts, you'd need to believe that by 2028, revenues will be €4.2 billion, earnings will come to €1.3 billion, and it would be trading on a PE ratio of 11.8x, assuming you use a discount rate of 7.6%.
  
• Given the current share price of €0.87, the analyst price target of €0.88 is 0.7% higher. 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.