UPDATE 2-Poland's Bank Pekao cuts ROE target, confirms mBank interest

(Adds CEO comments, detail, background. Changes slug for media clients)

LONDON, Nov 26 (Reuters) - Poland’s second largest lender Bank Pekao blamed regulatory costs and low interest rates for a cut to its key profit target on Tuesday, and confirmed it was looking closely at up-for-sale rival mBank.

Poland’s second largest lender by assets cut its 2020 return on equity (ROE) target to around 11.5% from an expected 12.5%, its Chief Executive Officer (CEO) Michal Krupinski told Reuters ahead of a presentation for investors in London.

The cut was mainly due to an increased regulatory burden, Krupinski told Reuters, referring to payments to the bank guarantee fund this year, as well as the fall in Europe’s interest rates this year which can eat into margins.

“There will be a lower (2020 regulatory) payment,” Krupinski said, adding “It is too early to give a view on the final number.”

Pekao’s CEO added that the bank plans to pay a dividend of 60-80% of this year’s profit.

Krupinski also confirmed the bank’s interest in smaller rival mBank, which was put up for sale by its German owner Commerzbank. He said Pekao could benefit from mBank’s advanced technology and the increased scale it would bring.

“We have commissioned analysts, we are working with advisors in the very initial stages of analysing this as a potential situation,” Krupinski said.

He declined to comment on a potential valuation for mBank, or the likely timeline for the sale, only adding: “Commercial banking is a business of scale - full stop.”

Consolidation could eventually leave around four large banks in Poland from the seven now operating, he said. Low interest rates and high regulatory and tax payments make it difficult for smaller banks to compete.

Krupinski added that Pekao might also look to acquire a tech-focused payments firm and potentially an asset management business.

There was also a call for Poland’s government and others around Europe to provide more stimulus to bolster their economies which are now slowing.

“This is not a crisis, this is not a recession, this is a slowdown,” Krupinski said referring to Poland.

But “in order to invest long term in growth, in my view you need to boost fiscal spending. And some of the biggest countries in Europe have headroom for fiscal spending, including Poland by the way.” (Reporting by Marc Jones; Writing by Marcin Goclowski; Editing by Louise Heavens and Emelia Sithole-Matarise)