>POLAND BANKS: From Wrestling to Merging (CITI)

■ 1Q10 Results In-Line — Our universe of seven Polish banks reported an aggregate 1Q10 net profit of ZL1,976m (+45% yoy, +22% qoq, +3.7% vs. CIRA estimates and +2.3% vs market consensus as reported by PAP). Despite high provisioning on retail loans (+34% yoy, -26% qoq), 1Q10 aggregate provisions came in 8% below our estimates. On the other hand, non-interest income came in 3% below our estimates driven by weak fees (partly due to a lower-than-expected recovery in investment fund fees).

■ Increased Competition in 2010 — Polish banks are abandoning strategies that concentrated on product niches and are embracing a universal banking strategy. This coupled with growth plans announced by some smaller players (e.g. Meritum Bank and Bank Pocztowy) is likely to lead to increased competition as more banks will sell a full range of products, while demand for banking services is expected to remain muted. This trend may negatively affect margins and revenues and presents a risk to our top-line growth forecasts.

■ More M&A in 2011? — Given increased focus on capital and funding globally in the sector, foreign players that find it difficult to accomplish their objectives in terms of growth or profitability of their Polish operations may consider engaging in M&A, either as an acquirer or a seller. M&A activity can be also triggered by financial problems of parent banks, as was the case with BZ WBK. Given Pekao’s expressed interest in M&A and PKO BP’s declaration to keep its options open, we analyse possible merger scenarios. Generally we expect consolidation to have a
positive impact on profitability longer-term.

■ Upgrading on Weakness — Following recent share price correction and due to attractive valuations we upgrade four Polish banks. Our top picks are PKO BP (1L rating maintained, TP ZL49, Tier 1 14.0%, only 24% of loans in FX) and Pekao (upgraded to 1L from 2L, TP ZL179.5, Tier 1 18.4%, only 27% of loans in FX). For investors with a higher risk appetite we recommend buying BRE (upgraded to 1M from 2M, TP ZL279) and BZ WBK (upgraded to 1M from 3M, TP ZL222). We upgrade ING BSK to Hold (2M from 3M, TP ZL809) and maintain our Sell rating on
Bank Millennium (3M, TP ZL4.70) and Kredyt Bank (3M, TP ZL16.9). We change our target prices to reflect our revised estimates and roll forward of our valuatio ns.

To read the full report: POLAND BANKS