Small banks promise big growth opportunities
In a June 25 report released earlier this month, Wood & Co. pointed out that five of the smallest banks on the exchange - Bank Ochrony Srodowiska (BOS), Bank Komunalny, LG Petrobank, PPABank and Amerbank - have increased their lending faster than that of the sector as a whole. In 1997, for example, the five banks watched their loan portfolios increase by an average of 47%, compared with the industry rate of 32.4%.
The banks' small size and limited branch networks have hindered their growth in deposits, however. Many of the banks need additional capital and active investors to help expand their offerings, improve their branch structure and sharpen their competitiveness, Wood & Co. said.
"A large part of (small banks) won't be able to carry on without the help from stronger financial institutions," the report said. "On the other hand, the Polish market is large enough to allow for the continued existence of smaller niche banks."
Part of the opportunity with the small banks is that they are likely takeover targets - particularly those that currently do not have a significant investor, the report said. Bank Komunalny and Amerbank are two obvious examples, the brokerage said.
Both banks have strong financial institutions as investors, but their involvement so far has been passive. The other institutions, BOS, LG Petrobank and PPABank are likely to find a solid strategic partner in the near future, the report said.
As a result, Wood & Co. gave "buy" recommendations to BOS and PPABank, "hold" recommendations to LG Petrobank and Amerbank, and labeled Bank Komunalny as a "sell."
BOS has turned its environmental connections - its major shareholders are the National and Province Environmental Protection Funds with 39.9% - into a steady lending business. Its relationship with the fund has helped the bank to win deals financing environmental projects that may have gone to other banks.
At the end of 1997, 65.6% of BOS' loan portfolio consisted of loans for environmental projects. The bank's return on equity of 23% is one of the highest of all WSE-listed stocks. While BOS has stepped up the pace of its lending activity, it hasn't let the quality of its loan portfolio slip. In 1997, only 3.4% of its loans were questionable, the report said.
Poland's impending membership in the European Union (EU) and the environmental clean up that must take place for the country to meet union requirements should result in a steady stream of business for BOS, the report said.
In 1990 environmental services accounted for 0.7% of Poland's gross domestic product (GDP). The share had risen to 1.7% by1996. But Wood & Co. warned that BOS may be overly dependent on business shifted from its main shareholder, and that the small bank struggles with its limited deposit base and funds.
At the end of 1997, BOS had total assets of zl. 2.4 billion ($750 million). It generated net profit of zl. 72.8 million ($22.75 million), up from zl. 51.4 million ($18.35 million) in 1996. The bank was trading at a price-to-earnings ratio of 4.6 on 1998 estimates when the report was issued in June.
Wood & Co.'s other favorite bank, PPABank, has plunged into the relatively unchartered territory of lending to small and medium-sized businesses - an area the brokerage said has unlimited opportunity.
"Given that this segment of the market is still unsaturated and that such businesses' financing needs are growing, we expect further dynamic growth of the bank," the report said.
PPABank already has a stable of strong investors. Its main shareholders include the Polish-American Enterprise Fund (PAEF) with a 23.2% stake and Enterprise Credit Corporation (ECC) with 22.7%. A smaller investor, Belgium's Generale Bank with 9.7%, may become more involved in the near future, the report said.
PPABank is also expanding its network from 14 branches to about 20 outlets throughout the country. Three of those outlets will go to Warsaw, Wroclaw and lodz. The bank's loan portfolio swelled 74.2% in 1997. The percentage of non-performing loans dropped from 4.1% at the end of 1996 to 3.1% at the end of 1997.
At the end of last year, PPABank had total assets of zl. 641 million ($200 million). It reported net profit of zl. 13.7 million ($4.28 million), up from zl. 9.1 million ($3.25 million) in 1996.
LG Petrobank, which Wood & Co. rates a "hold," already benefits from a strong strategic investor - Korea's LG Group, which owns 54.5%. LG Petrobank is the only well-capitalized small bank, Wood & Co. said. The bank had total assets of zl. 604.2 million ($188.75 million) at the end of 1997. The drawback, however, is its low, 7.4% return on equity. That, Wood & Co. said, reflects that the bank is not using its capital efficiently enough.
The majority of LG Petrobank's clients are from the fuel and energy sectors, but the bank has begun to diversify and is attempting to remake itself into a nationwide, universal bank specializing in both corporate and individual clients.
The approach has already helped increase the bank's deposit base - deposits from individuals increased by zl. 14.4 million, or 7.7%, from March 31 to April 30, 1998 alone. At the end of 1997, LG Petrobank generated zl. 14.6 million ($4.56 million) in net profit, up from zl. 7.6 million ($2.71 million) in 1996.
The only bank to receive a "sell" recommendation, Bank Komunalny, is locked into a tiny niche market that shows little growth potential, the report said. The bank specializes in serving local governments, and Wood & Co. said that it expects the volume of this business to remain thin.
Bank Komunalny is also the only one of the five to see its net profit deflate. At the end of 1997 its net profit dropped to zl. 7.3 million ($2.28 million), down from zl. 8 million ($2.86 million) in 1996.
According to Wood & Co., Komunalny must focus on diversifying its activities and finding a strategic partner to help it expand. The main shareholders are Gdynia Municipality with 19.9% (22.3% voting rights) and Poland Growth Fund with 9.7% (9.4% of voting rights). "Without a change in the shareholder structure and successful wooing of a true strategic investor, the prospects for large further growth are uncertain," the report said.
The banks' small size and limited branch networks have hindered their growth in deposits, however. Many of the banks need additional capital and active investors to help expand their offerings, improve their branch structure and sharpen their competitiveness, Wood & Co. said.
"A large part of (small banks) won't be able to carry on without the help from stronger financial institutions," the report said. "On the other hand, the Polish market is large enough to allow for the continued existence of smaller niche banks."
Part of the opportunity with the small banks is that they are likely takeover targets - particularly those that currently do not have a significant investor, the report said. Bank Komunalny and Amerbank are two obvious examples, the brokerage said.
Both banks have strong financial institutions as investors, but their involvement so far has been passive. The other institutions, BOS, LG Petrobank and PPABank are likely to find a solid strategic partner in the near future, the report said.
As a result, Wood & Co. gave "buy" recommendations to BOS and PPABank, "hold" recommendations to LG Petrobank and Amerbank, and labeled Bank Komunalny as a "sell."
BOS has turned its environmental connections - its major shareholders are the National and Province Environmental Protection Funds with 39.9% - into a steady lending business. Its relationship with the fund has helped the bank to win deals financing environmental projects that may have gone to other banks.
At the end of 1997, 65.6% of BOS' loan portfolio consisted of loans for environmental projects. The bank's return on equity of 23% is one of the highest of all WSE-listed stocks. While BOS has stepped up the pace of its lending activity, it hasn't let the quality of its loan portfolio slip. In 1997, only 3.4% of its loans were questionable, the report said.
Poland's impending membership in the European Union (EU) and the environmental clean up that must take place for the country to meet union requirements should result in a steady stream of business for BOS, the report said.
In 1990 environmental services accounted for 0.7% of Poland's gross domestic product (GDP). The share had risen to 1.7% by1996. But Wood & Co. warned that BOS may be overly dependent on business shifted from its main shareholder, and that the small bank struggles with its limited deposit base and funds.
At the end of 1997, BOS had total assets of zl. 2.4 billion ($750 million). It generated net profit of zl. 72.8 million ($22.75 million), up from zl. 51.4 million ($18.35 million) in 1996. The bank was trading at a price-to-earnings ratio of 4.6 on 1998 estimates when the report was issued in June.
Wood & Co.'s other favorite bank, PPABank, has plunged into the relatively unchartered territory of lending to small and medium-sized businesses - an area the brokerage said has unlimited opportunity.
"Given that this segment of the market is still unsaturated and that such businesses' financing needs are growing, we expect further dynamic growth of the bank," the report said.
PPABank already has a stable of strong investors. Its main shareholders include the Polish-American Enterprise Fund (PAEF) with a 23.2% stake and Enterprise Credit Corporation (ECC) with 22.7%. A smaller investor, Belgium's Generale Bank with 9.7%, may become more involved in the near future, the report said.
PPABank is also expanding its network from 14 branches to about 20 outlets throughout the country. Three of those outlets will go to Warsaw, Wroclaw and lodz. The bank's loan portfolio swelled 74.2% in 1997. The percentage of non-performing loans dropped from 4.1% at the end of 1996 to 3.1% at the end of 1997.
At the end of last year, PPABank had total assets of zl. 641 million ($200 million). It reported net profit of zl. 13.7 million ($4.28 million), up from zl. 9.1 million ($3.25 million) in 1996.
LG Petrobank, which Wood & Co. rates a "hold," already benefits from a strong strategic investor - Korea's LG Group, which owns 54.5%. LG Petrobank is the only well-capitalized small bank, Wood & Co. said. The bank had total assets of zl. 604.2 million ($188.75 million) at the end of 1997. The drawback, however, is its low, 7.4% return on equity. That, Wood & Co. said, reflects that the bank is not using its capital efficiently enough.
The majority of LG Petrobank's clients are from the fuel and energy sectors, but the bank has begun to diversify and is attempting to remake itself into a nationwide, universal bank specializing in both corporate and individual clients.
The approach has already helped increase the bank's deposit base - deposits from individuals increased by zl. 14.4 million, or 7.7%, from March 31 to April 30, 1998 alone. At the end of 1997, LG Petrobank generated zl. 14.6 million ($4.56 million) in net profit, up from zl. 7.6 million ($2.71 million) in 1996.
The only bank to receive a "sell" recommendation, Bank Komunalny, is locked into a tiny niche market that shows little growth potential, the report said. The bank specializes in serving local governments, and Wood & Co. said that it expects the volume of this business to remain thin.
Bank Komunalny is also the only one of the five to see its net profit deflate. At the end of 1997 its net profit dropped to zl. 7.3 million ($2.28 million), down from zl. 8 million ($2.86 million) in 1996.
According to Wood & Co., Komunalny must focus on diversifying its activities and finding a strategic partner to help it expand. The main shareholders are Gdynia Municipality with 19.9% (22.3% voting rights) and Poland Growth Fund with 9.7% (9.4% of voting rights). "Without a change in the shareholder structure and successful wooing of a true strategic investor, the prospects for large further growth are uncertain," the report said.
