Quarter Earnings Forecast

Transcription

1 18 July 2006 WIG WIG-Banki Average Average P/E 2007 Analysts: (+48 22) Michał Marczak (+48 22) Michał Mierzwa (+48 22) Andrzej Lis (+48 22) Krzysztof Radojewski (+48 22) Kamil Kliszcz (+48 22) Periodic Report Quarter Earnings Forecast Q Earnings BRE Bank Securities We expect strong performance from the banking sector in the second quarter. The main growth driver will be the continuing demand for financial services in the retail segment, which propels volumes, and, as a result, also bank revenues. Retail volumes will be boosted by mortgage loans which surged in anticipation of the Recommendation S restrictions that will enter into force at the beginning of the third quarter and that are spurring borrower concerns about the availability of FCY mortgage financing going forward. For the second half of the year, we expect the share of zloty mortgage loans to increase on the back of the regulatory FCY lending restrictions and the historically low market interest rates in Poland. We also expect the corporate banking business to improve steadily, as demand for external financing from corporations continues to rise (corporate debt was up 3.7% YoY at the end of May 2006). We anticipate that the eight banks for which we conducted earnings forecasts will record a 9% increase in their combined net profit. We applied conservative assumptions when calculating cost of risk. In a macroeconomic environment which is very favorable to clients, banks are recovering bad debt, and borrowers are meeting their obligations. Pre-provision operating profit will improve by an estimated 18%. We think that BZ WBK will show the highest rate of profit growth, boosting its bottom line by over 43% YoY The strong Q2 earnings will be a good opportunity to take profit on banking stocks. Looking at the current prices of banking stocks, we conclude that the potential for further price appreciation is diminishing due to the following factors: High rates of earnings growth projected for the coming years for banks, and the fact that the market prices are already discounting the expectations of an upward momentum in the banking sector going forward. Increasing bond yields, pushing the cost of equity in income-based valuation models. An over-6% decline in the WIG-Banki Index compared to its value on May 11th, 2006, reflecting on relative valuation. End of the dividend season. are happy to share their profits, but all of them have already established their holders of record. In conclusion, we see no good reason to maintain increased exposure to banks over the next three months. From the eight covered banks, Bank Handlowy is our top stock pick. It is the cheapest in the sector with a 2006P/E ratio of 12.7 at PLN 69 per share. We would not advise investors to increase exposure to PKO BP which will post a strong income from its retail banking business, but whose revenues from banking operations will be affected by a revaluation of its debt securities portfolio. BRE 18 July Bank 2006 Securities does not rule out offering brokerage services to an issuer of securities being the subject of a recommendation. Information concerning a conflict of interest arising in connection with issuing a recommendation (should such a conflict exist) is located on the final page of this report.

2 BPH Suspended P/E* 2006 P/E* P/BV* 2006 P/BV* PLN 713 Net interest income % % n/a 1981 n/a Net interest margin 3.4% 3.5% 3.5% 3.5% n/a 3.6% n/a Rev. from bank. oper % % n/a 3084 n/a Operating profit** % % n/a 1561 n/a Gross profit % % n/a 1294 n/a Net profit % % n/a 1027 n/a BPH is doing great pending division As promised by BPH s CEO, the trends observed in the first quarter continued into the second quarter. Net interest income will be an estimated 9% higher YoY, driven by growing retail loan volumes, and supported by high mortgage loan sales. We expect a continuation of the positive trends observed in BPH s retail and SME business. In the corporate line, the bank reported a 10% decline in volumes and a 20% increase in deposits after Q After the first three months of the year, BPH recognized a 9.5% erosion in corporate loans, while corporate deposits rose 13.5% YoY. If revenues continue to move up at the current rate (we expect revenue from banking operations to rise 16.3% YoY and 3.3% QoQ vs. 14.2% YoY and 4.5% QoQ after Q1 2006) and costs are kept under control (we anticipate total expenses to increase 8% YoY but only 1.1% QoQ), Q2 net profit may advance by 24.5% YoY and 9% QoQ. Sales will probably decrease in the coming months as BPH stops providing foreign-currency home financing (which, in our opinion, will also affect sales of other products, such as account, credit cards, and cash loans). Investors are also more likely to rely on merger news in H2: UCI has declared that it wants to launch the enlarged Pekao as early as January 1st, 2007, which means that the pre-merger developments will be happening in the second half of BZWBK Hold P/E P/BV PLN 174 PLN Net interest income % % % Net interest margin 3.2% 3.0% 3.2% 3.0% 3.2% 3.2% Rev. from bank. oper % % % Operating profit** % % % Gross profit % % % Net profit % % % All engines go We expect BZ WBK to post excellent Q2 profits, boosted by dividends from CU companies (PLN 53m) and the sale of holdings in TIM (we estimate PLN 8m, but the gains are likely to be much higher). The profit growth will be derived mainly from the bank s core business. According to the bank, the loan portfolio in the second quarter was ahead of the 4.8% YoY growth rate recorded in Q1 (we assume an 8% growth this year). Cash and mortgage loan sales are accelerating. BZ WBK s corporate debt is increasing at a faster rate than the sector s 4%. The robust lending business will be reflected in BZ WBK s net interest income (especially from cash loans) and fee income, which will also be fostered by insurance sales (tied with loan sales), and asset management fees. Salary pressure (salaries at banks are usually raised in the second quarter), and sales chain expansion, will push the bank s total costs by 7.5% YoY and 2.1% QoQ. Still, revenues at BZ WBK increase at a much faster rate than costs. A positive operating leverage suggests an estimated net profit figure which will top last year s by 43.3 percent. We do not see any threat to our FY2006 consolidated net profit forecast of PLN 753m (up 46% YoY). The bank will achieve 54% of our full-year earnings estimates in the first half of the year. 18 July

3 Handlowy Accumulate P/E P/BV PLN 69 PLN Net interest income % % % Net interest margin 3.0% 3.2% 3.0% 3.0% 3.0% 3.1% Rev. from bank. oper % % % Operating profit** % % % Gross profit % % % Net profit % % % Full-year guidance safe Bank Handlowy will have achieved 55% of out FY2006 consolidated net profit forecast (PLN 712m) after the second quarter. We expect the net interest income to increase by 1.2% QoQ. The Q figures are not comparable due to reclassifications of derivatives in revenue from banking operations. BH s fee income should increase driven by the soaring CitiFinancial sales, an open fund unit sales architecture, and higher sales of insurance products attached to consumer lending products. In costs, we anticipate that the bank will recognize the savings generated on restructuring and administrative expense cuts. Total costs will decrease by 1.4% (1.2% in FY2006). The second quarter of 2005 witnessed the posting of financial income and capital gains items in uniquely high amounts, making a high base period. The Q2 net profit will also be shaped by our conservative provision estimates. Even through the bank has posted either no, or very low provision expense for several quarters now, we estimate the provision balance at 0.5% of the average net loan portfolio. Considered in quarter-on-quarter terms and net of the gains from asset sales in Q1 2006, Bank Handlowy s operating income will increase by over 5%, which, if costs are kept under control, will boost the pre-provision operating profit by 12.4%. ING BSK Buy P/E ,4 13,9 P/BV ,2 2,0 PLN PLN Net interest income % % % Net interest margin 2.0% 2.4% 2.0% 2.0% 1.9% 1.9% Rev. from bank. oper % % % Operating profit** % % % Gross profit % % % Net profit % % % Slow but steady progress The second quarter will mark an increase in consumer loan products (most notably cash loans). In the corporate banking line, the loan portfolio grew at the rate of 4% YoY, matching the sector average rate recorded by the National Bank of Poland. Wider exposure to retail banking will drive the net interest income and fee income which we expect to gain 3.5% and 3.9% QoQ respectively. Year-over-year, fee income will appreciate by 16.4% (similar as in the first quarter, when the YoY growth rate stood at 16.9%, and faster than the FY2006 estimate). Revenue from banking operations edged up by an estimated 8% YoY, while costs were slower at 6.1% YoY (we estimate total costs to fall 1.4% QoQ), resulting in a 23.7% increase in the preprovision operating profit. The slower-then-expected growth in net profit was due to cost of risk. We estimate that provision charges will amount to 0.5% of the average net loan portfolio in Q In Q and Q1 2006, ING BSK recognized a positive provision balance (PLN 12m and PLN 48m respectively). The debt recovery income carried through provisions may raise the bottom line. Given the current projections and the FY2006 net profit estimate of PLN 525m, the cumulative net profit for H could reach PLN 290m, fulfilling the FY2006 target in 55%. 18 July

4 Kredyt Bank Hold P/E P/BV PLN 17.0 PLN 17.7 (PLN m) 2Q2006 2Q2005 chnage 1H2006 1H2005 change change Net interest income % % % Net interest margin 3.0% 3.2% 3.0% 3.0% 3.0% 3.1% Rev. from bank. oper % % % Operating profit** % % % Gross profit % % % Net profit % % % Belgian resolve Kredyt Bank is committed to its strategy of steadily increasing exposure to retail banking while keeping costs down. The bank recorded an impressive 11-percent YoY increase in its net interest income, owing to improved profitability of the loan products and stronger retail sales. Growing volumes drove the bank s revenue from banking operations which increased by an estimated 6% YoY (we project a 5.4% rise for FY2006). As the bank expands and is just about to start opening new branches (the plan for 2006 is to open 40 outlets, with the first launched in May), cost control (we expect total expenses to increase 1.6% QoQ and 2.6% YoY) will lead to a positive operating leverage and a 13.4% rise in recurring pre-provision operating profit (an estimated PLN 87m for Q2). Even though Kredyt Bank may post additional debt recovery income which will reflect positively on the provision expense, we project that the cost of risk will correspond to 0.5% of the average net loan portfolio. We do not know the specifics of how successful KB has been in recovering its debt, therefore, we cannot assess the impact on its profit. Kredyt Bank also owns tax assets which it will recognize in the balance sheet. The impact of those assets will be smaller in 2006 than in 2005, but Kredyt Bank will most likely start paying its taxes in the second half of the year. The Q2 gross profit will double thanks to recognition of the gains from the sale of PLN 1 billion worth of loss loans. We estimate those gains at PLN 96m, to be recognized in other operating income, based on the (rather conservative) assumption that the bad debt portfolio was sold for approximately 10% of its value. Millennium Hold P/E P/BV PLN 5.7 PLN 5.91 Net interest income % % % Net interest margin 2.9% 3.2% 2.9% 2.8% 2.4% 2.3% Rev. from bank. oper % % % Operating profit** % % % Gross profit % % % Net profit % % % Housing boom beneficiary We expect Millennium to show excellent Q2 financial results achieved through record sales of mortgage loans. The soaring volumes will drive the NII, while fee income will increase on the back of the high cross-sell ratio (2.83 at the end of Q1) for sales based on Millennium s core product, home loans. Higher bond yields will not affect the bank s performance, as its portfolio does not include debt securities measured at fair value through profit and loss (assuming that the debt securities classified under other categories are not sold). We also expect costs to increase by approximately 4% due to network enlargement. The main cost driver will be administrative expenses, while amortization and depreciation will stay flat from last year as the bank has just started to expand. We estimate that provisions will correspond to 0.5% of the average loan portfolio in Q Last year, the bank recognized a positive provision balance. Millennium determined its cost of risk at 0.45% of the average gross loan portfolio (for several quarters now), but provision charges decline thanks to its debt recovery efforts. This may also happen in the second quarter, but we do not have access to detailed data which would enable a reliable assessment of how successful those efforts are. We anticipate that Millennium will post a profit 6.2% below last year's due to the considerable increase in provision charges. QoQ profit will be an estimated 12.3%. higher 18 July

5 Pekao SA Suspended P/E* 2006 P/E* P/BV* 2006 P/BV* PLN Net interest income % % n/a 2350 n/a Net interest margin 3.6% 3.9% 3.6% 3.8% n/a 4.1% n/a Rev. from bank. oper % % n/a 4342 n/a Operating profit** % % n/a 2067 n/a Gross profit % % n/a 1874 n/a Net profit % % n/a 1537 n/a Changes would be futile Pekao s Q2 earnings will reflect the same trends which were observed in the first quarter. However, a higher comparable base will lead to slower year-over-year growth in profits. Q2 profits will increase by 9.1% YoY, adding to the 17% by which the cumulative profits have increased since the beginning of the year. Pekao is recording a growing interest in zloty mortgage loans. The popularity of loans denominated in the domestic currency will continue to grow following entry into force of Recommendation S, and in an environment of historically low market interest rates in Poland. Another catalyst for Pekao's financial performance, especially its retail banking business, will be the strong sales volumes of the Pożyczka Eskpresowa loan. After a weak start of the year, which was a natural sequel for all banks to the invariably excellent fourth quarter, business should pick up in subsequent quarters. We do not expect Pekao to post a considerable increase in costs. As a result of cost control, as the bank waits to merge with BPH (spending is on hold until over 280 branches of the former BPH are incorporated in Pekao s organization), costs will only tick up 1 percent year over year. PKO BP Hold P/E P/BV PLN 39.7 PLN 33 (PLN m) 1Q2006 1Q2005 change change change Net interest income % % % Net interest margin 3.9% 3.9% 3.9% 4.0% 3.9% 3.9% Rev. from bank. oper % % % Operating profit** % % % Gross profit % % % Net profit % % % Could be better PKO BP s large exposure to retail banking, the surge in FCY mortgage loans in Q (the bank is the volume leader in mortgage loans), and a successful initiative to increase cash loan sales, will further reinforce the bank s positioning in the strongest segment of banking services, and net interest income and fee income will increase as a result. The successful sales of retail banking products will be offset in Financial Income and Capital Gains which will show losses incurred on debt securities measured at fair value through profit and loss. According to our estimates, PKO BP s core business revenues will decline by 1.4% year over year (and tick up 1.1% QoQ). Costs will stay flat from Q Cost control will generate a positive operating leverage which will contribute to the 4.7 percent-growth in pre-provision operating profit. Our Q2 06 Cost of Risk estimate is 0.5% of the average loan portfolio in the quarter. Lower-than-expected provision charges will reflect positively on the gross profit, given that Q1 cost of risk was 0.2%. Our Q2 profit estimates represent 48.6% of the FY2006 net profit target of PLN 1.93 billion. * EPS and BVPS for BPH i Pekao market consensus, Bloomberg, June 13, 2006 * * pre-provision operating profit 18 July

6 2006 Earnings Dates Company Standalone Q Consolidated Q Consolidated H BPH BZWBK GETIN HANDLOWY ING BSK KREDYT BANK MILLENNIUM PEKAO PKOBP Source: Parkiet 18 July

7 DI BRE Banku S.A. Actually Recommendation Company Recommendation Target Price Date ABG Accumulate AGORA Accumulate BPH Suspended ING BSK Buy BUDIMEX under review BZWBK Hold COMARCH Hold COMPUTERLAND Buy ELDORADO Buy ELEKTROBUDOWA under review EMAX under review EUROCASH Accumulate FARMACOL Buy GETIN Suspended HANDLOWY Accumulate KĘTY Buy KGHM Hold KREDYT BANK Hold KOGENERACJA Buy LOTOS Hold MILLENNIUM Hold MONDI Accumulate NETIA Hold PEKAO Suspended PKO BP Reduce PGF Accumulate PGNiG under review PKNORLEN Buy POLIMEX Accumulate POLMOS LUBLIN Hold PROKOM Buy PROSPER Buy RAFAKO Buy SOFTBANK Hold TELEKOMUNIKACJA POLSKA Hold TORFARM Hold July

8 Changes in recommendations within the last month Spółka Rekomendacja Cena docelowa Data wydania AGORA Accumulate BZWBK Hold COMPUTERLAND Buy ELDORADO Buy EUROCASH Accumulate FARMACOL Buy HANDLOWY Accumulate KREDYT BANK Hold LOTOS Hold PKO BP Reduce PROKOM Buy RAFAKO Buy RAFAKO Buy Statistics All BRE Bank Securities' Accounts Statistics Sell Reduce Hold Accumulate Buy Sell Reduce Hold Accumulate Buy number percent 0.0% 3.6% 39.3% 25.0% 32.1% 0.0% 0.0% 50.0% 25.0% 25.0% 18 July

9 Research Department: Michał Marczak tel. (+48 22) Deputy Director Telco, mining, metals, media, hotels Analysts: tel. (+48 22) Andrzej Lis tel. (+48 22) IT Michał Mierzwa tel. (+48 22) Oil & Gas Krzysztof Radojewski tel. (+48 22) Pharmaceuticals, construction, utilities Kamil Kliszcz tel. (+48 22) Retail, other Jacek Borawski tel. (+48 22) Technical analysis Sales and Trading: Piotr Dudziński tel. (+48 22) Director Grzegorz Domagała tel. (+48 22) Deputy Director Salesmen: Michał Skowroński tel. (+48 22) Marzena Łempicka tel. (+48 22) Krzysztof Solus tel. (+48 22) Traders: Emil Onyszczuk tel. (+48 22) Grzegorz Stępien tel. (+48 22) Joanna Niedziela tel. (+48 22) Aleksander Mazur tel. (+48 22) Michał Świtakowski tel. (+48 22) Dom Inwestycyjny BRE Banku S.A. ul. Wspólna 47/ Warszawa 18 July

10 List of abbreviations and ratios contained in the report. EV net debt + market value (EV economic value) EBIT Earnings Before Interest and Taxes EBITDA EBIT + Depreciation and Amortisation PBA Profit on Banking Activity P/CE price to earnings with amortisation MC/S market capitalisation to sales EBIT/EV operating profit to economic value P/E (Price/Earnings) price divided by annual net profit per share ROE (Return on Equity) annual net profit divided by average equity P/BV (Price/Book Value) price divided by book value per share Net debt credits + debt papers + interest bearing loans cash and cash equivalents EBITDA margin EBITDA/Sales Recommendations of BRE Bank Securities S.A. A recommendation is valid for a period of 6-9 months, unless a subsequent recommendation is issued within this period. Expected returns from individual recommendations are as follows: BUY we expect that the rate of return from an investment will be at least 15% ACCUMULATE we expect that the rate of return from an investment will range from 5% to 15% HOLD we expect that the rate of return from an investment will range from 5% to +5% REDUCE we expect that the rate of return from an investment will range from -5% to -15% SELL we expect that an investment will bear a loss greater than 15% Recommendations are updated at least once every nine months. The present report expresses the knowledge as well as opinions of the authors on day the report was prepared. The present report was prepared with due care and attention, observing principles of methodological correctness and objectivity, on the basis of sources available to the public, which BRE Bank Securities S.A. considers reliable, including information published by issuers, shares of which are subject to recommendations. However, BRE Bank Securities S.A., in no case, guarantees the accuracy and completeness of the report, in particular should sources on the basis of which the report was prepared prove to be inaccurate, incomplete or not fully consistent with the facts. Recommendations are based on essential data from the entire history of a company being the subject of a recommendation, with particular emphasis on the period since the previous recommendation. Investing in shares is connected with a number of risks including, but not limited to, the macroeconomic situation of the country, changes in legal regulations as well as changes on commodity markets. Full elimination of these risks is virtually impossible. BRE Bank Securities S.A. bears no responsibility for investment decisions taken on the basis of the present report or for any damages incurred as a result of investment decisions taken on the basis of the present report. It is possible that BRE Bank Securities S.A. renders, will render or in the past has rendered services for companies and other entities mentioned in the present report. BRE Bank Securities S.A., its shareholders and employees may hold long or short positions in the issuers shares or other financial instruments related to the issuers shares. BRE Bank Securities S.A., its affiliates and/or clients may conduct or may have conducted transactions for their own account or for account of another with respect to the financial instruments mentioned in this report or related investments before the recipient has received this report. Copying or publishing the present report, in full or in part, or disseminating in any way information contained in the present report requires the prior written agreement of BRE Bank Securities S.A. Recommendations are addressed to all Clients of BRE Bank Securities S.A. The activity of BRE Bank Securities S.A. is subject to the supervision of the Polish Securities and Exchange Commission. BRE Bank Securities S.A. serves as animator in relation to the shares of the following companies: Millennium, Mondi, Polimex - Mostostal Siedlce, Polmos Lublin, Mieszko, Skarbiec Nieruchomości certificates. In the last 12 months BRE Bank Securities S.A. has been an offering agent of the issuer s shares in a public offering for the following companies: Lotos, Torfarm. BRE Bank Securities S.A. receives remuneration from issuers for services rendered to the following companies: Agora, Computerland, Kęty, KGHM, Lotos, Polimex - Mostostal Siedlce, Polmos Lublin, Prokom Software, Softbank, Torfarm. The present Monthly Report exclusively contains information previously published by BRE Bank Securities S.A. and only comprises a comprehensive presentation of unaltered data. The information, including recommendations, contained in the Monthly Report has been published in separate reports, the publication dates of which are located on page 3 of the Monthly Report. In connection with the above, BRE Bank Securities S.A. does not consider the Monthly Report to be a recommendation as understood in the Order of the Council of Ministers, dated 19 October 2005 r., in regard to information comprising recommendations concerning financial instruments or their issuers. Individuals who did not participate in the preparation of recommendations, but had or could have had access to recommendations prior to their publication, are employees of BRE Bank Securities S.A. authorised to access the premises in which recommendations are prepared, other than the analysts mentioned as the authors of the present recommendations. Strong and weak points of valuation methods used in recommendations: DCF acknowledged as the most methodologically correct method of valuation; it consists in discounting financial flows generated by a company; its weak point is the significant susceptibility to a change of forecast assumptions in the model. Comparative based on a comparison of valuation multipliers of companies from a given sector; simple in construction, reflects the current state of the market better than DCF; weak points include substantial variability (fluctuations together with market indices) as well as difficulty in the selection of the group of comparable companies. 18 July