Update. Strong Loan Sales

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1 11 July 2007 Banks Poland Update BKRE.WA; KRB.PW Hold (Reiterated) Current price PLN Target price Market cap Free float Avg daily trading volume (3M) Shareholder Structure PLN PLN 7.2bn PLN 1.0bn PLN 7.08m KBC 80.00% Sofina SA 5.53% Others 14.47% Sector Outlook We predict that banks will continue to record two-digit recurring-income growth rates in FY2007. If this trend continues over a longer term the 09/06CAGR will be over 17%. Our expectations are founded on the inevitable further increase in the banked population, market saturation with financial products, and a revival in corporate lending. Even though we assumed a positive scenario for Polish bank earnings driven by growing volumes, the premiums relative to western banks make us neutral on the sector. Company Profile is ranked 9th in terms of assets among Poland s listed banks. Its current strategy focuses on retail clients and growth in the Polish market of bancassurance. After reporting losses in 2002 and 2003, the bank underwent in-depth internal restructuring. currently focuses on promoting its new corporate image and products, with the aim of increasing its market share from 4%-5% to 10%. Strong Loan Sales s stellar FQ2 home loan sales figures (over PLN 1 billion) suggest an overall strong quarter. We expect to see improvement in loan sales by the Consumer Finance line which has considerable potential to increase market share. Our price target on is PLN per share, with a reiterated HOLD rating. We raised the target by 14% following an upward revision to our net income projections for (by 19% for FY2007, 9% for FY2008, and 12% for FY2009), and due to increased market prices of its peers which we used in our relative valuation. The new target price would have been even higher had it not been for the rising yield on 10-year T-bonds that we take to be the risk-free rate in our Cost of Equity calculations. An increase in the risk-free rate from 5.3% to 5.7% led to a ca. 5% contraction in our income-based valuation of. Second-quarter results We anticipate that will show PLN 83m in FQ2 net income on an operating income before provisions of PLN 109m. If we exclude the impact of NPL sales on FQ2 earnings (PLN 14.54m credited to pre-tax income, PLN 131m added to net income), provided that our estimations prove accurate, the bank s net income will have improved by 7%, and operating income before provisions will have soared 64%. is no longer eligible for tax credits this year, with significant implications for net income growth. We expect recurring banking income to increase 13% y/y, suggesting a big improvement in operating income on a 1.4% y/y rise in costs. The quality of receivables The ratio of non-performing loans to total loans stood at 12.3% at the end of FQ1, down 1.2 ppts against FQ4 06 and a whopping 15.2 ppts relative to FQ1 06. This improvement in quality is owed to a restructuring of the NPL portfolio and effective debt recovery efforts. As these efforts continue and the new loan portfolio grows, the NPL/Loans ratio might decrease further to below 10% in FY2007. This shows that costs of risk will be low in FY2007. vs. WIG PLN WIG Marta Jeżewska (48 22) marta.jezewska@dibre.com.pl Management gaps s management is a few members short. One gap was filled with a supervisory board member, and the responsibilities of the MB members who left were delegated to those who stayed. Considering that the bank has not chosen replacements from among its own executive staff yet, it is probably going to look for them outside of the organization. We hope to see a complete set of top executives installed in the management board in the second half of the year. (PLN m) F 2007F 2008F 2009F Net interest income NIM 3.6% 3.6% 3.7% 3.8% 4.0% Revenue f/banking oper Operating income Pre-tax income Net income ROE 26.0% 24.8% 16.3% 16.1% 18.2% P/E P/BV D/PS Dividend yield 0.8% 1.4% 1.8% 2.5% 3.2% BRE 11 July Bank 2007 Securities does not rule out offering brokerage services to an issuer of securities being the subject of a recommendation. Information concerning a conflict of interest arising in connection with issuing a recommendation (should such a conflict exist) is located on the final page of this report.

2 Earnings Forecast Long-term forecast We are raising our long-term net income projections for by 19% in FY2007, 9% in FY2008, and 12% in FY2009 following an upward revision in our bank income estimates by 1.7% in FY2007 and FY2008 and 3.6% in FY2009 and a downward revision in cost estimations by 2.2% for FY2007, 1.8% for FY2008, and 1.3% for FY2009. The changes in income estimates were prompted by strong loan sales, while the motivation behind the lowered cost estimates was the bank s huge potential to finance growth with old cost savings, and the management s tight spending policy. As a result of these changes, our forecasts of Kredyt Bank s operating income before provisions increased by 10.5% in FY2007, 8.4% in FY2008, and 11.2% in FY2009. Our revised estimate for recurring pre-tax income growth in FY2007 is 42% (upped from 19.2%), with the expected income value raised to PLN 447m. Last year, reported a total of PLN 461m under pre-tax income, including PLN m from sale of its nonperforming loan portfolio. Recurring pre-tax income reached PLN 315m, and included net recoveries of PLN 19m. The FQ1 07 pre-tax income amounted to PLN 103m. FY2007 provisions are expected to be 20 bps below average net loans (PLN 22m charge-offs). did not make any considerable reversals in FQ1 07 (provisions at PLN 375,000). Efforts are still underway to recover defaulted loans, and they have brought good results in the past, adding to pre-tax income. The ratio of non-performing loans to total loans currently stands at 12.3%, i.e. 1.2 ppts below the FQ1 level. Assuming that will stay committed to improving the quality of its receivables by maximizing recoveries on defaulted loans, this ratio will dip into the single-digit territory by the end of the year. All this suggests that this year s cost of risk will be low. For subsequent years, we project cost of risk at 0.5% of average net loans. Recurring income estimates (PLN m) 2006* 2007F 2008F 2009F Income from banking operations Banking income Operating income before provisions Pre-tax income Net income Y/Y Income from banking operations 12.7% 12.9% 14.0% Banking income 14.6% 11.9% 13.7% Operating income before provisions 58.5% 22.8% 25.9% Pre-tax income 41.7% 11.0% 26.5% Net income 7.2% 11.0% 26.5% Source:, * adjusted for NPL sales (PLN 145.4m added to pre-tax income and operating income, PLN 131m credited to net income) 11 July

3 Second-quarter preview FQ2 earnings forecast (PLN m) 1Q06 2Q06 3Q06 4Q06 1Q07 2Q07F Q/Q Y/Y Net interest income % 11.3% Net fee and commission income % 13.6% Financial income and capital gains % 20.0% Income from banking operations % 12.9% Other net operating income % -92.9% Total banking income % -23.2% Operating costs, amortization & depreciation % 1.4% Operating income before provisions % -48.5% Provisions n/a 57.4% Pre-tax income % -50.9% Tax % n/a Net income % -60.3% Source:, In the second quarter of 2006, reported significant gains from a sale of nonperforming loans (PLN 145.4m added to pre-tax income, PLN 131m credited to net income). As a result, this year s FQ2 income will show a deterioration relative to last year s. In a quarteron-quarter comparison, the only non-recurring item was the NPL sale in FQ1 07 (PLN 8m added to FQ1 07 other net operating income), on a much smaller scale than the one made in FQ1 06. The table below shows our earnings estimations for based on adjusted FQ2 06 and FQ1 07 results. FQ2 earnings forecast (PLN m) 1Q06 2Q06* 3Q06 4Q06 1Q07* 2Q07F Q/Q Y/Y Net interest income % 11.3% Net fee and commission income % 13.6% Financial income and capital gains % 20.0% Income from banking operations % 12.9% Other net operating income % 629.7% Total banking income % 16.0% Operating costs, amortization & depreciation % 1.4% Operating income before provisions % 63.9% Provisions n/a 57.4% Pre-tax income % 63.5% Tax % n/a Net income % 6.5% Source:, * adjusted for one-offs 11 July

4 Stellar loan sales FY2006 gross loans 568; 5% 6221; 49% 5765; 46% Source:, individuals businesses government clients The ratio of retail loans to the loan total at the end of FQ1 07 stood at ~49%, flat on FQ4 06. We predict that this ratio will increase to 50% by the end of the year, thanks to strong sales of mortgage loans in the first half of the year, reinforced by the bank s commitment to developing its consumer finance business. Retail is the apple of the management s eye at present, and the focus of most growth-oriented initiatives. chooses to give up volumes that do not allow for optimum capital allocations, including loans to governmental agencies which dropped by over 14% in FY2006. A contraction was also observed in the corporate loan portfolio (5% y/y in FY2006), but this was mainly due to the NPL sale which took place in FQ2 06. We will gain a better insight into 's loan portfolios from the FQ2 earnings report expected to show how gross loans behaved after being adjusted for securitized loans. For FY2007, we expect a 26% increase in net loans, generated on an over-41% growth in retail loans, a 10.6% increase in corporate loans, and a 10% decline in government receivables. We raised the net loan value estimate by 5% (PLN 14.66bn vs. PLN 13.99bn) to account for strong home loan sales and reduced exposure to corporate borrowers. Mortgage loans We were very impressed with s FQ2 07 loan sales which reached PLN 1.2bn. Sales for the first half of the year are close to PLN 1.8bn (PLN 532m in FQ1). The bank s official earnings guidance pegged mortgage loan sales at PLN 2.5bn the value that we based our previous forecasts on, which ceases to be valid in light of the FQ2 success. We raised the full-year sales forecast to PLN 3.5bn. To achieve this, the bank will have to generate PLN 1.7bn in the second half of the year. This should be no problem: after a seasonal slowdown in the summertime when clients think about where to go on holiday rather than buying homes, sales should rebound to the second-quarter levels in September. 11 July

5 Mortgage loan sales (PLN m) Q06 2Q06 3Q06 4Q06 1Q07 2Q07F mortgage loan sales Source:, In line with the general trend, has been selling more zloty loans than Swiss franc loans lately. According to our estimates, the sector s portfolio of zloty mortgage loans soared 79% y/y, while foreign-currency loans increased by 58%. This compared to last year, when PLN home loans were increasing at a rate of 11%, and FCY loans surged 37%. As for Kredyt Bank, its zloty portfolio for FQ1 07 was up 94% on a year earlier, and the foreign-currency portfolio was 42% higher. These numbers reflects the bank's market share situation, which is that it is increasing in zloty mortgage loans, and shrinking in foreign-currency loans. The overall share in the mortgage financing market is on a steady upward trend (4.2% vs. 4.1% in FQ and 4.0% in FQ1 06). In the first quarter, foreign-currency receivables from home borrowers made up the larger part of s portfolio, but we think that this balance will shift in the second half of the year. Tremendous second-quarter sales figures might get a bigger piece of the market pie. The management s ambition is a 7%-8% market share, which, they believe, can be achieved still this year. If the bank lives up to our expectations and sells PLN 3.5 billion-worth of loans, its share in the sector s new sales (we forecast PLN 57bn) will be 6.1%. A continuation of the aggressive sales strategy will help capture additional market share. An increase in the ratio of home loans to total household loans could lead to a tightening in the interest margins earned on this client group. The reason will not be lower margins on mortgage loans (it is hard to imagine that margins could go any lower than their current level). The share of mortgage loans will increase at the expense of consumer loans. The nominal values of both portfolios are increasing, so, there can be no talk of a margin erosion. But, since mortgage loan sales are bound to grow faster, their share in total loans will also expand. We predict that this growth will be partly offset by interest rate hikes. The reference rate has risen 50 bps since January. Such an increase is good for banks so long as it does not affect the lending business, which it has not so far. Interest-bearing assets at the end of last year were almost 9% higher than liabilities. Another factor that will drive the net interest margin going forward will be the expanding share of loans in interest-bearing assets. Loans generate the highest margins from among the three components of the interest-bearing asset base. Even if the margin on the loan portfolio itself tightens, the portfolio s increasing share in the balance-sheet total ensures good margin performance. 11 July

6 Volume relationships 120.0% 100.0% 80.0% 60.0% 40.0% 20.0% 94.3% 89.8% 105.0% 57.6% 94.7% 88.6% 106.9% 49.2% 93.9% 86.2% 108.9% 55.3% 94.4% 86.1% 109.6% 63.2% 94.7% 86.0% 110.1% 70.6% 95.0% 85.9% 110.6% 76.9% 0.0% F 2008F 2009F interest-bearing assets/assets interest-bearing assets/interest-bearing liabilities interest-bearing liabilities/liabilities loans/interest-bearing assets Source:, Consumer loans is moving aggressively into consumer finance. With a subsidiary like Żagiel, the bank has huge unused growth potential. Żagiel s focus to date as financial intermediary has been installment plans, and its System Ratalny Żagiel service is found at over 20 thousand stores. Since 2006, Żagiel has also been lending cash and issuing credit cards via a hotline and customer service locations. Żagiel is ranked the third largest financial intermediary after Expander and Open Finance, even without mortgage loan sales on the scale enjoyed by the two leaders. Financial intermediary loan sales in Expander Open Finance Żagiel Notus Dom Finansowy QS Fiolet PDK Goldenegg A-Z Finanse Source: Rzeczpospolita,, In FY2006, Żagiel extended 963 thousand loans totaling PLN 1.68 billion (the average loan is just under PLN 1,700). 85% of revenues were generated from installment plans, and the remaining 15% was owed to new products. Żagiel plans to up the share of cash loans and credit cards to 50% of its total income within a few years. For this year, the intermediary expects that both these product lines will show much more robust growth than installment plans. CEO Mr. Oziębło wants his firm to grow faster than the entire consumer finance market, 11 July

7 i.e. at a pace of over 13% a year in the years ahead. As for credit cards, Żagiel wants to capture several percent of the market within five years, i.e. have 500 thousand cards in circulation by 2012 (the number of cards issued through FQ1 07 was 33.9 thousand). Żagiel is expanding its Kredyt Punkt sales chain, with 100 such outlets in place at the end of 2006, expected to double by the end of We view Żagiel as a source of immense growth potential for the group. itself also has a consumer finance offering in place, but targeted to a different client group. It is similar to what is offered by the bank s competitors in Retail, and includes cash loans, credit cards, overdrafts, etc. Żagiel and s consumer finance ranges complement each other in that Żagiel offers consumers installment plans not available at the bank, and the bank extends overdraft facilities that cannot be found at Żagiel s branches. reaches out to a different type of customer who seeks higher financing, generates smaller risks, and therefore brings lower margins than an average Żagiel client. s cash loan sales stand at PLN 25m, and this monthly average will increase as the bank expands this product line (new loan features and financing terms, a different marketing strategy), and is expected to accelerate even further in the fourth quarter, which is always a great season for the consumer finance business. If sales were to remain flat at the current level, will sell PLN 300 million worth of cash loans this year. But we believe that the end result will be more to the tune of PLN 400m achieved on the two drivers described above. also issues credit cards, and had thousand of them in circulation at the end of FQ1 06. Here again Żagiel plays a vital role as a source of credit card accounts. Credit card issuances by the group (thousands) Q06 2Q06 3Q06 4Q06 1Q07 Żagiel Source:, 11 July

8 Żagiel s loan portfolio (PLN m) Q06 2Q06 3Q06 4Q06 1Q07 Source:, instalment plans cash loans credit card debt Żagiel s FY2006 sales were virtually flat compared to a year earlier (a 6% decline), due to a loss of an important distributor (bankruptcy) who generated around 20% of Żagiel s sales. The sales volumes were rebuilt in 2006, and FQ1 07 saw an over-15% increase on FQ1 06. We expect similar, if not faster growth rates going forward, possibly bringing the FY2007 loan sales to a level close to PLN 2 billion. Żagiel s loan sales (PLN m) Q05 2Q05 3Q05 4Q05 1Q06 2Q06 3Q06 4Q06 1Q07 Żagiel's loan product sales Source:, From the point of view of the entire group, Żagiel s loan portfolio accounted for 10.5% of aggregate gross loans at the end of FY2006, and retail loans made for almost half of total loans. These ratios did not change much in FQ 07. Żagiel s portfolio constituted 21% of the group s aggregate retail loan portfolio. 11 July

9 FY2006 gross retail loans by type 8% 4% 3% 2% 3% 21% 51% 8% home loans overdraft facilities Żagiel's loan portfolio individuals cash loans (bank) mortgage loans credit cards (bank) other Source:, TFI shows no growth Investment funds are the weakest link in s sales chain. Although KBC TFI is not consolidated in s financial statements (it is a 30% subsidiary indirectly owned through Kredyt Trade), investment fund shares are mainly sold through the bank. And the funds are losing market share. Until they recover, their contribution to the aggregate earnings will be negligible. Assets under management (PLN m), market share % 4.1% 4.1% 3.1% 4.2% 4.4% 3.9% 3.6% 3.6% 3.4% 3.1% 5.0% 4.5% 4.0% 3.5% % % % % % % 0 0.0% Jun-05 Jul-05 Aug-05 Sep-05 Oct-05 Nov-05 Dec-05 Jan-06 Feb-06 Mar-06 Apr-06 May-06 Jun-06 Jul-06 Aug-06 Sep-06 Oct-06 Nov-06 Dec-06 Jan-07 Feb-07 Mar-07 Apr-07 May-07 Jun-07 KBC TFI market share Source:,, Analizy Online The AUM of s investment funds increased by PLN 76m from April through June. Such minute growth (just under 2%), much below the market average (19%), led to a slippage in market share from 3.6% to 3.1% in that period. KBC s plans to grow market share in all areas of its Polish retail business most probably include investment funds. As a result, the TFI s long-term outlook does not have to be as bleak as its current performance might suggest. The fact that KBC TFI is losing ground to competition is going to reflect on FQ2 07 earnings, although income should be at least equal to 11 July

10 that reported in FQ1. The average AUM value increased from PLN 4.1bn to PLN 4.4bn, which means that the bank will record higher income from management fees, but lower income from upfront fees due to a slowdown in asset volumes. Costs under control has enough cost savings set aside to finance further expansion. So far, it has managed to grow without incurring large costs. The cost-to-income ratio in FQ1 was below 68%, and our estimate for fiscal 2007 is 67%, which might prove an overly conservative forecast if sales continue on their strong upward momentum. The bank keeps a tight lid on costs, and declares that they will not increase faster than once or double the inflation rate. FQ1 07 saw a 1.5% y/y decline in overall costs, and a staggering 20% drop on a quarter on quarter basis. Going forward, we expect expenses to go into a steady upward trend, and predict that the bank will not allow itself to up costs as much as last year in the fourth quarter, unless income turns out to be so stellar that the management decide to pay bonuses, or that it can offset necessary extra expenses. When analyzing, we pay more attention to its operating efficiency (C/I ratio) than the actual cost figures, and see that the bank has the largest savings base from among all listed banks after they have mostly already used up theirs. For FY2007, we anticipate an 8% y/y decline in SG&A and a 10% decrease in amortization charges. Even so, average amortization and depreciation expenses in the next three quarters will amount to PLN 26m vs. PLN 24m in FQ1 07, and SG&A expenses will reach an average PLN 90m vs. PLN 79m in FQ1 07. Employment costs will increase going forward as brings the salaries earned by its staff up to par with industry averages, and due to more intense sales rewarded with cash bonuses. We forecast that salaries will increase 11% in FY2007. The expansion exercise will not bring about considerable headcount upsizing as can reallocate staff from existing to new branches, but the average salary is expected to increase by 10% a year. Costs (PLN m) Q05 2Q05 3Q05 4Q05 1Q06 2Q06 3Q06 4Q06 1Q07 Source:, Salaries SG&A expenses Amortization & Depreciation 11 July

11 Y/Y changes in costs and income, C/I ratio 90.0% 80.0% 70.0% 76.3% 73.3% 75.7% 69.4% 72.0% 45.4% 77.0% 78.1% 67.8% 50.0% 40.0% 30.0% 60.0% 50.0% 40.0% 30.0% 20.0% 10.0% 0.0% -6.9% -10.1% -25.5% -17.7% -20.2% -13.7% 0.7% -0.4% -10.5% -4.8% 5.5% 50.8% 15.4% -1.5% 1.3% -0.4% 2.5% 4.6% 1Q05 2Q05 3Q05 4Q05 1Q06 2Q06 3Q06 4Q06 1Q % 10.0% 0.0% -10.0% -20.0% -30.0% C/I ratio Banking income Costs Source:, 11 July

12 Valuation Long-Term Valuation We based our valuation on the Gordon model formula P/BV=(ROE-g)/(COE-g), which we used to calculate the implied price-to-book value ratio. The P/BV ratio depends on our assumed ROE (return on equity), cost of equity (COE) which is the sum of the risk-free rate and the risk premium entailed in the purchase of the bank s shares, and long-term growth rate (g). Dividends Last year s income was distributed to shareholders at a payout ratio of 21.4%, representing PLN 101m, or PLN 0.37/share in dividends. The record date fell on July 2nd, and payment is slated for July 18th. Because s shares now trade ex dividends, we did not take this source of cash flows into account in our income-based valuation. In line with its growing dividend policy, the bank increased its payout ratio from 14% last year to 21% this year. Our dividend projections for FY2007 FY2009 are 35%, 45% and 45% of net income respectively, the same as in our previous Research Report. The exclusion of dividends led to a PLN 0.37 per-share decrease in our valuation of Kredyt Bank s stock taking into account the time value of money (our previous valuation was in May). Valuation assumptions The market risk premium is 5%. The risk-free rate is 5.681% (close of trading, July 9th, 2007), based on 10-year bond yields. Assuming a beta of 1, these assumptions imply a cost of equity of 10,681% (the same for all of the banks in our coverage universe). The long-term growth rate assumption is an unrevised 4% after FY2009. Relative to our previous Research, the only change in valuation assumptions was the risk-free rate raised from 5.325% to 5.681%, with significant implications for valuation. At an unchanged risk-free rate (5.325%), the valuation would have been ca. 5% higher. Impact on income-based valuation We determined the per-share price of s stock to be PLN as at July 2007, expected to reach PLN in nine months time, The new target is 9% higher than the one we set in May. All in all, the factors that led us to the current per-share estimate were as follows: The assumption that s net income will increase by 19% in FY2007, 9% in FY2008, and 12% in FY2009 produced a higher FY2009 ROE estimate (18.2% vs. 16.7% forecasted in our previous valuation), driving the price up. The risk-free rate is also a key determinant in stock valuation, and its increase since May contracted s estimated value by ca. 5%. The final key factor was the exclusion of dividends (PLN 0.37/share, making for a gross dividend yield of 1.4% on the current price level). Lastly, the fact that we rolled forward the fair value month from May to July also played as part in producing the end result. 11 July

13 Gordon Model* (PLN/share) 2007P=F 2008F 2009F + Risk-free rate 5.68% 5.68% 5.68% 5.68% Risk premium 5.00% 5.00% 5.00% 5.00% Beta Cost of equity 10.68% 10.68% 10.68% 10.68% EPS BVPS ROE forecast 16.3% 16.1% 18.2% Long-term ROE 18.2% Growth rate (g) 4.0% Implied P/BV 2.12 Equity at year-end FY Equity at year-end FY Equity at year-end FY Equity at year-end FY Dividend per share Discounted dividends Total discounted dividends 1.83 Fair value of one KB share at July Target Price (9 mo) Source:, banks *risk-free rate: 10Y bond yield as at the end of trading on 9th July The Gordon Model produced a nine-month per-share target price of s stock of PLN The per-share fair value at July 2007 is PLN Target Price sensitivity to Gordon Model Risk-free rate 4.0% 4.5% 5.0% 5.681% 5.5% 6.0% 6.5% 3.5% Risk premium 4.0% % % % % % Source: Target Price sensitivity to Gordon Model Risk-free rate 4.0% 4.5% 5.0% 5.681% 5.500% 6.0% 6.5% Growth rate (g) 3.5% % % % % % % Source: 11 July

14 Relative Valuation Below, we present our calculations of 's stock price set against the average multiples of comparable banks listed on the Warsaw Stock Exchange. The multiples were calculated on the basis of EPS and BVPS estimates and closing prices as at 10th July Our valuation is based on the weighted average of the following multiples: a 15% weighting for P/BV (10% for FY2007 and 5% for FY2008), an 85% weighting to P/E (45% for FY2007 and 40% for FY2008). We adjusted BPH s EPS multiple for the impact of the sale of equity interests in CU PTE on forecasted FY2007 earnings, which is PLN 179m added to pre-tax income. and ca. PLN 145m credited to after-tax income, making for a little over PLN 5/share. Valuation Summary P/BV P/E 2007F 2008F 2007F 2008F BPH* * BZ WBK Bank Handlowy ING BSK Millennium Pekao PKO BP Average Median Weights 10% 5% 45% 40% s multiples Premium/discount to average -24.1% -25.5% -10.5% -3.9% Premium/discount to median -25.4% -27.2% -5.1% -2.6% BVPS* for EPS for Price based on Average Source:, banks * adjusted P/E Our multiples-based valuation yielded a per-share price of PLN 29.5, which is PLN 4.3 (17%) more than our previous target on. The change was brought about by upward revisions to our earnings projections for FY2007 and FY2008, and a near-5% increase in the average trading multiples of the banks constituting the comparable group for in relative valuation. 11 July

15 ROE vs. P/BV (2007F) 30.0% 28.0% ROE 2007F 26.0% 24.0% 22.0% 20.0% BPH BZ WBK PKO BP Pekao* 18.0% 16.0% ING BSK Millennium 14.0% 12.0% Bank Handlowy 10.0% Source:, banks * Pekao pre-merger P/BV 2007F ROE vs. P/BV (2008F) 30.0% 28.0% 26.0% 24.0% BZ WBK Pekao* PKO BP ROE 2008F 22,.% 20.0% BPH Millennium 18.0% 16.0% 14.0% ING BSK Bank Handlowy 12.0% 10.0% Source:, banks * Pekao pre merger P/BV 2008F 11 July

16 ROE vs. P/BV (2009F) 30.0% 28.0% 26.0% 24.0% PKO BP BZ WBK Pekao* ROE 2009F 22.0% 20.0% Millennium 18.0% 16.0% ING BSK Bank Handlowy 14.0% 12.0% 10.0% Source:, banks * Pekao pre merger P/BV 2009F Valuation Summary Valuation summary (PLN/share) Gordon Model Relative Valuation Average M TP Source:, banks We set our new nine-month price target on at PLN 26,76/share, with an advice to HOLD the stock at the current price level. 11 July

17 INCOME STATEMENT (PLN m, IAS) F 2008F 2009F Net interest income Interest income Interest expense Non-interest income incl Net fee and commission income F/X gains/losses Financial income and capital gains Income from banking operations Other net operating income Total banking income Non-interest expense, incl.: Personnel costs Amortization and depreciation Other expenses Operating income before provisions Provisions Share of profits/losses of associates Pre-tax income Tax Profit attributable to minority shareholders Net income Dividends paid CORE RATIOS Net interest margin (total assets) 2.8% 3.6% 3.6% 3.7% 3.8% 4.0% Net interest margin (interest-bearing assets) 3.2% 4.0% 4.0% 4.1% 4.2% 4.3% Interest spread 3.3% 4.0% 3.8% 3.9% 3.9% 4.0% Costs / Income 76.5% 73.0% 67.9% 66.7% 63.5% 59.6% Costs / Assets 4.7% 4.3% 4.3% 4.0% 3.9% 3.7% Personnel costs / Income 30.9% 33.6% 32.0% 34.7% 34.1% 33.0% Provisions / Operating Profit -44.9% -2.8% 4.3% -4.7% -13.8% -13.3% Provisions / Loans -1.1% -0.1% 0.2% -0.2% -0.5% -0.5% Non-interest income / Total income 54.1% 38.2% 43.1% 37.7% 36.7% 35.9% Operating profit / Assets 1.5% 1.6% 2.0% 1.9% 2.1% 2.4% ROE 14.4% 26.0% 24.8% 16.3% 16.1% 18.2% ROA 0.7% 2.0% 2.2% 1.5% 1.1% 1.1% ANNUAL GROWTH RATE Net income 110.0% 165.2% 12.6% -22.7% 11.0% 26.5% Operating income before provisions 39.6% 1.5% 33.6% 6.1% 22.8% 25.9% Total banking income -2.1% -11.6% 12.3% 2.4% 11.9% 13.7% Net interest income -12.3% 18.9% 3.5% 12.1% 13.7% 15.1% Non-interest income 8.7% -37.4% 26.4% -10.4% 9.0% 11.2% Non-interest expense -10.3% -15.6% 4.4% 0.7% 6.5% 6.6% 11 July

18 BALANCE SHEET (PLN m, IAS) F 2008F 2009F Cash and Central Bank balances Receivables from financial institutions Debt securities Loans Shares and other equity Fixed assets Other assets Total assets Liabilities to financial institutions Deposits Securities outstanding Subordinated debt Other debt, including financial liabilities Equity Share capital Total equity and liabilities NPL / Loans 30.0% 28.5% 13.2% 9.5% 7.0% 5.2% NPL /Assets 19.9% 16.8% 7.5% 6.1% 5.0% 4.0% Provisions / NPL 65.4% 74.2% 65.3% 74.0% 88.1% 105.8% Provisions / Total loans 19.6% 21.2% 8.6% 7.0% 6.1% 5.5% Provisions / Assets 13.0% 12.5% 4.9% 4.5% 4.4% 4.3% ASSET ANALYSIS Equity /Assets 7.2% 8.1% 9.4% 9.6% 9.7% 9.8% Loans /Assets 54.3% 46.6% 52.0% 59.6% 66.9% 73.0% Deposits / Assets 67.1% 69.7% 69.9% 72.7% 72.9% 72.9% Loans / Deposits 80.8% 66.8% 74.3% 82.1% 91.8% 100.1% Loan growth -24.0% -14.6% 19.0% 26.9% 24.2% 20.8% Deposit growth -3.2% 3.4% 7.0% 14.8% 11.1% 10.7% Asset growth -12.5% -0.5% 6.7% 10.6% 10.8% 10.6% 11 July

19 Research Department: Michał Marczak tel. (+48 22) Director Strategy, telco, mining, metals, media Marta Jeżewska tel. (+48 22) Deputy Director Banks Analysts: Krzysztof Radojewski tel. (+48 22) Pharmaceuticals, construction, utilities Kamil Kliszcz tel. (+48 22) Retail, materials, other Piotr Janik tel. (+48 22) , IT, other Kacper Żak tel. (+48 22) Real-estate developers, other Jacek Borawski tel. (+48 22) Technical analysis Sales and Trading: Piotr Dudziński tel. (+48 22) Director Grzegorz Domagała tel. (+48 22) Deputy Director Marzena Łempicka-Wilim tel. (+48 22) Deputy Director Traders: Emil Onyszczuk tel. (+48 22) Grzegorz Stępien tel. (+48 22) Tomasz Dudź tel. (+48 22) Dom Inwestycyjny BRE Banku S.A. ul. Wspólna 47/ Warszawa 11 July

20 List of abbreviations and ratios contained in the report: EV net debt + market value EBIT Earnings Before Interest and Taxes EBITDA EBIT + Depreciation and Amortisation P/CE price to earnings with amortisation MC/S market capitalisation to sales EBIT/EV operating profit to economic value P/E (Price/Earnings) price divided by annual net profit per share ROE (Return on Equity) annual net profit divided by average equity P/BV (Price/Book Value) price divided by book value per share Net debt credits + debt papers + interest bearing loans cash and cash equivalents EBITDA margin EBITDA/Sales Recommendations of A recommendation is valid for a period of 6-9 months, unless a subsequent recommendation is issued within this period. Expected returns from individual recommendations are as follows: BUY we expect that the rate of return from an investment will be at least 15% ACCUMULATE we expect that the rate of return from an investment will range from 5% to 15% HOLD we expect that the rate of return from an investment will range from 5% to +5% REDUCE we expect that the rate of return from an investment will range from -5% to -15% SELL we expect that an investment will bear a loss greater than 15% Recommendations are updated at least once every nine months. This document has been created and published by S.A. The present report expresses the knowledge as well as opinions of the authors on day the report was prepared. The opinions and estimates contained herein constitute our best judgement at this date and time, and are subject to change without notice. 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Individuals who did not participate in the preparation of this recommendation, but had or could have had access to the recommendation prior to its publication, are employees of S.A. authorised to access the premises in which recommendations are prepared, other than the analysts mentioned as the authors of the present recommendation. Strong and weak points of valuation methods used in recommendations: DCF acknowledged as the most methodologically correct method of valuation; it is based in discounting financial flows generated by a company; its weak point is the significant susceptibility to a change of forecast assumptions in the model. Comparative based on a comparison of valuation multipliers of companies from a given sector; simple in construction, reflects the current state of the market; weak points include substantial variability (fluctuations together with market indices) as well as difficulty in the selection of the group of comparable companies. Previous recommendations issued for Recommendation Accumulate Hold Hold Accumulate Hold Accumulate Hold Date issued Price on day of recommendation WIG on day of recommendation July