BCP has been one the worst performers among our banks’ universe year-to-date. At -60%, the stock has managed to double the sector’s correction. This could sound strange at first sight as the BCP’s markets have been relatively less impacted by the COVID-19 outbreak. This is the case as regards Poland and Mozambique, but also as regards Portugal, albeit to a lesser extent.
BCP vs Banks (rebased)
Such a correction translates into a deeply depressed 0.2x P/TBV!
Past geographical expansion mistakes not fully solved yet
BCP is Portugal’s largest privately-owned bank where it enjoys a dominant position with almost one fifth of loans and deposits. After a long period of investment and divestment operations, which saw the group actively expanding abroad in search for new growth opportunities, BCP’s scope has stabilised and focused on former African colonies (Mozambique and to a lesser extent Angola) and Poland. The Mozambican position is strong (BCP controls two-thirds of the country’s leading bank with an almost 30% market share) and makes full sense as the country remains strongly interrelated with Portugal. Other foreign positions are more questionable. In Angola, the group had to merge its operations with Banco Privado Atlântico in early 2016, retaining a 20% stake in the combined entity. However, the main issue, in our view, is Poland where the group owns only 50.1% of the eighth largest player in the country which lacks critical size with a meagre 5% market share in loans and deposits.
Portugal’s recovery on track
One must reckon that the contribution from foreign operations were particularly welcomed to enable the group to absorb the heavy losses generated by its Portuguese business. Better late than never, the long-awaited recovery of the domestic operations materialised in 2018 and were confirmed in 2019 when their contribution equalled that of foreign operations for the first time since the Great Financial Crisis. And, without the COVID-19 outbreak, the rebalancing would have been confirmed this year. However, as the pandemic impacts all of the group’s markets, we do not expect it to modify the balance of the geographical profit mix.
The third-quarter domestic performance showed strong top-line resilience driven by net interest margin widening (boosted by the TLTRO’s extensive usage) and ongoing efficiency gains. Asset quality trends proved more benign than expected, leading management to reduce its full-year guidance to the lower end of its 90-120bp cost of risk former guidance.
Management remains particularly confident as regards 2021, sticking to its 90-120bp guidance (contrary to other banks, the group decided to spread the provisioning effort equally over two years) in spite of the resurgence of the pandemic, the upper range corresponding to the scenario of a delayed vaccine.
Poland: the Swiss franc mortgage saga
The chart below reveals a striking fact. Although the stake in Bank Millennium, the group’s Polish subsidiary, accounts for “only” 25% of BCP’s market capitalisation, both stocks have proven to be impressively correlated not only during the COVID-19 outbreak but also for a longer period.
Hence, it is important to understand the rationale behind the Polish subsidiary’s share price correction.
BCP vs Polish subsidiary over two years (rebased)
As shown in the chart above, the correction was in two phases.
The first one was attributable to the unfavourable ruling over CHF mortgages granted by Polish banks over several years. The exposure, which accounts to around one-third of total mortgages, is only 2% provided for, meaning that the bulk of losses are still pending. Bank Millennium’s exposure amounts to almost €3bn (35% of its mortgage book and 18% of its total loan book) covered at 3.8%. Bank Millennium has lost around 75% of its value since the ruling, corresponding to about €1.7bn and to an estimated €2.2bn before tax. In that context, one can say that the potential loss over the CHF mortgage book is largely priced in.
The second phase relates to the pandemic outbreak. Until now, the impact has been fairly limited, taking the form of short-lived cost of risk inflation (it doubled in Q2 before normalising in Q3) and net interest margin squeeze (the central bank lowered its refi rate by 150bp to 0.5% while long term interest rates almost halved to 1.4%) offset by trading gains’ realisation.
However, the CHF mortgage ruling has created a FX exposure for Polish banks in general and Bank Millennium in particular whose share price has closely tracked the fall of the zloty vis-a-vis the Swiss franc. The pandemic has inflated the Swiss currency.
Mozambique: currency depreciation
The Mozambican operations have proven relatively immune to the crisis so far. We expect a 25% reduction of their contribution this year, largely driven by loan book attrition as the country’s currency (the Metical) decreased by 12% year to date.
The stock trades at a particularly depressed 0.2x the tangible book value (based on end September data) making it one of the cheapest banks within our universe. As mentioned above, it seems that the CHF mortgage-related risk is largely priced in, whereas the pandemic is not expected to drive the group’s earnings into negative territories.
In that context, as shown in the table below, all the valuation approaches we use return strong and consistent upside potentials. For bottom-fishers, obviously.
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