Komerční banka or Erste Group? Which one should we expect higher appreciation from in the next 12 months

Although there are not too many titles on the Prague Stock Exchange, it is the banks that are largely represented there. Probably the two most discussed of them are Komerční banka and Erste Group. I will look at both of them in this article and try to evaluate which one is the better investment.

Komerční banka/Erste Group

Basic information

Komerční banka is one of the most important banking institutions in the Czech Republic, where it is the third largest bank in terms of assets and number of clients. It is engaged in universal banking in the Czech Republic and also serves corporate clients in Slovakia. Since 2001, KB has been part of the French banking group Société Générale.

Erste Group Bank is a Central European banking group with a significant presence mainly in Austria and the Czech Republic. Like KB, it is engaged in universal banking. Austria is the most important market in terms of lending volume, with a share of more than 60 % according to the latest figures, followed by the Czech Republic with 15 % and Romania with less than 8 %.

Valuation and financial stability

As both banks are profitable, we use the price-to-earnings ratio (P/E ratio) to compare their valuation. Komerční banka' s shares are currently trading at 7.58 P/E. When comparing KB to the EuroStoxx 600 Banks index, where the P/E is 7.29, we get a smaller premium for KB stock. However, this is justified given the above-average return on equity.

Komerční banka presented very solid results for 2Q 2022. Net interest income rose 47.4% y-o-y from CZK 4.953bn to CZK 7.302bn, up CZK 140mn y-o-y. CZK 140 more than the market consensus. The higher yield was achieved due to rising interest rates.

Komerční banka - market information

In contrast, Erste sells significantly cheaper at a P/E of 4.78. Compared to purely Czech traded banks such as KB, Erste has a slightly lower return on equity (ROE). However, this fact is already reflected in the current market valuation. However, it is wrong to assume that rising interest rates in the Eurozone in the coming quarters should help ROE to increase.

Erste Group's 2Q 2022 earnings beat market expectations. Net interest income rose 13.2% y-o-y from €1.277bn to €1.445bn. This was driven by rising interest rates primarily in the Czech Republic, followed by Hungary and Romania.

Erste - market information

Future outlook and potential risks

The macroeconomic environment is negatively affected by the war in Ukraine and the energy crisis. There are gradual downward revisions to GDP growth estimates and continued strong inflation. These conditions are likely to result in lower loan portfolio growth. However, on the other hand, the CNB is keeping interest rates high, which will lead to improved profitability, either in the granting of new loans or the refinancing of existing ones.

On the other hand, rising rates are another negative factor for the growth rate of the loan portfolio. At least in the mortgage sector, we can expect a more significant decline in mortgage production this year.

A big bogeyman is the possible introduction of an extraordinary tax on profits, also known as the 'windfall tax'. The rate would affect, among other things, the banking sector from next year. Financial houses are of course opposed to this sectoral tax. As a result, KB would be hit harder than Erste.

Moreover,Erste will benefit from a return to normal monetary policy in the coming quarters. Euro interest rates will rise in the coming quarters and could reach 2%. However, the central banks in the Czech Republic and Hungary have already started raising rates, which will benefit Erste subsidiaries operating in these countries through rising interest margins. After all, this is something we could see already in 2Q.

Dividend

Komerční banka is one of the stocks with a long-standing annual dividend payout and normally follows a dividend policy of paying out 60% to 70% of net profit. However, the payout has been discontinued in 2020 in light of the coronavirus. The bank returned to paying dividends after regulatory praise last year, when it managed to pay out CZK23.86 per share to shareholders.

Komerční banka 's dividend in 2022 and beyond, Source.

This year, KB distributed a dividend of CZK 43.80 from its 2021 profit to shareholders. However, given the accumulated capital from 2019 and 2020, it is possible that Komerční banka will pay an extraordinary dividend in the second half of this year. Analysts estimate this dividend at approximately CZK 55 per share.

Thedividend in 2023 is expected to be approximately CZK 51.1 per share, which corresponds to a dividend yield of 8.9%. However, this outlook may be affected by the introduction of the forthcoming extraordinary tax!

Erste Group Bank hasalso suspended dividend paymentsin 2020 in view of the coronavirus. In 2021, the bank has resumed its payment in accordance with the regulator's rules. The bank's board of directors decided at this year's general meeting held on Wednesday 18 May to pay a gross dividend of EUR 1.60 per share. In its latest report, Erste said it plans to pay a dividend of EUR 1.9 this year. The dividend yield would thus be almost 8.5%.

As Erste is an Austrian company, the taxation of its dividends is governed by Austrian law. The withholding tax here is 27.5%.

Conclusion

Let's summarise. Both banks have a universal banking business model and offer a full range of services to their clients. At the same time, they are very well capitalised, which is related to dividend potential. This is slightly higher on KB's side, where there is a chance that we will see an extraordinary dividend as early as this autumn. However, one of the potential risks remains the introduction of an extraordinary tax on profits.

While KB is a purely Czech bank with the exception of Slovenko, Erste boasts diversification across the CEE region. In this case, both banks should continue to benefit from high interest rates. However, it is important to highlight Erste, which should also benefit from ECB rate hikes in the coming quarters. I therefore believe that an investor will not do wrong whichever bank he buys.

DISCLAIMER: All information provided here is for informational purposes only and is in no way an investment recommendation. Always do your own analysis.

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