OREANDA-NEWS. July 28, 2011. Renaissance Capital, the leading emerging markets investment bank, has initiated research coverage of the Polish banking sector, with a report on PKO Bank Polski (rated BUY at Renaissance, with a target price of PLN49.1), and Bank Pekao (rated HOLD, with a PLN172 target price).

The report, Polish banks: Competition, consolidation and regulation, addresses the key themes driving the sector. “Polish banking has many of the positive aspects of a classic, developed-market banking sector, with the additional bonus of still having growth potential,” says David Nangle, Head of Research at Renaissance Capital, and co-author of the report. “Further sector consolidation is essential, in our view, to help realise synergies and unlock value in a broadly fairly valued space.”

The report notes that while intensive competition and more active regulation are beginning to erode margins and revenues, consolidation is a potential saving grace, and is well overdue. Renaissance Capital analysts conclude that signs Kredyt Bank and Bank Millenium’s parents, KBC and BCP, may be looking to sell out of the market, are positive; and that more active regulation – despite its negative impact on returns – is positive for sector stability.

“Taking in the EMEA context, Poland increasingly looks like a developed market, with net interest margins at 2-4%, loan growth struggling to reach double digits, and a cost of risk running below 100 bpts,” note Renaissance Capital analysts. “Poland outpaces South Africa in growth terms, but growth is currently south of what we would expect or see in Russia or Turkey.”

Current sector trends are seen as solid, with Renaissance expecting low-double-digit credit growth in 2010-2011 – principally driven by mortgage – and hopes of a pick-up in consumer and SME lending. The rising-rate environment should be NIM-supportive, according to the report, but ongoing competitive pricing is a drag – although asset quality continues to improve, with a cost of risk at Western European levels.

Renaissance Capital analysts favour PKO over Pekao, noting, “this is a relative call, based on value and returns,” adding that, “Pekao has a lot of positive optionality around capital release and potential M&A, but it is too early to factor this in. Within an EMEA context, we believe Russian banks, and Sberbank in particular, offer better value for higher growth at this juncture.”