Downgrade to Neutral on valuation grounds
Since the beginning of the pandemic we have been of the view that Erste had the right characteristics to outperform in an uncertain macro environment: solid capital, strong asset quality and profitability structurally above the sector average. None of these features have changed. However, having outperformed the sector by 12% in the past 3 months, the stock is now trading at a non-negligible P/E premium (2022e P/E of 9.3x vs 8.1x for the sector) despite a) a similar earnings trajectory in the next two years and b) a comparable amount of excess capital. We downgrade to Neutral but increase our TP to EUR30 on a roll-forward of our valuation to 2023e.
CEE/Austria lockdown measures and macro prospects are not dissimilar to those in WE...
In 2020 most CEE countries as well as Austria rolled back restrictions after the first wave of the Covid pandemic relatively quickly, containing 2020e GDP contractions. However, as the second wave is affecting the region much more, restrictions similar to those reintroduced in Western Europe have been in place since October in most countries. Similar levels of restrictions will likely result in a pace of macro recovery in CEE and in Austria in 2021-22 not dissimilar to that of WE.
...leading to a very similar earnings recovery trajectory
On our estimates Erste''s PPP will grow by c.6.5% between 2020e and 2022e with the cost of risk declining from 79bps to 47bps. Although with a different mix (lower revenues, but also lower costs), we estimate almost the exact same numbers for the sector as a whole. Over the period Erste''s ROTE should increase by 3.1ppt to 8.2% vs a 3.4ppt improvement to 7.4% for the sector.
Ample excess capital, but on par with that of many other banks
As dividend restrictions have been extended, we believe the 2019 DPS of EUR0.75 won''t be paid on Feb 15. The 2020e DPS payable in May is capped at 20bps of CT1 capital, equal to EUR0.55-0.60 per...
