We maintain our Buy rating on . The stock price is down 39.0% over the last 12 months, broadly in line with the FTSE Eurofirst 300 banks index, despite the delivery of strong earnings growth (+26.0% y/y) in 2007 and the reiteration of management guidance for at least 20% in 2008, and 25% in 2009. Management has underlined that has zero exposure to the US mortgage market and mark-to-market losses on ABS/CDOs have been relatively minor, € 30.2m (pre-tax) via the P&L and € 81.1m via the balance sheet in 2007. The depreciation of the RON (-10.9% versus € since end-September) and rising interest rates in Romania have negatively affected both our earnings forecasts and valuation. However, this has been partially offset by the strong performance of Ceska Sporitelna and the CZK (+9.8% versus € since end September). Overall, our net earnings forecast has been adjusted slightly downwards by 0.5% to € 1,416.0m (+20.5% y/y) for 2008 and 1.4% to € 1,747.1m (+23.4% y/y) for 2009. Our fair value estimate has been cut by 8.3% to € 60.33 per share, implying upside of 71.4%.
• Management guidance reiterated: Management has reiterated guidance for earnings growth of at least 20% in 2008, and 25% in 2009. Consensus earnings estimates remain firm and are only slightly below guidance. Our forecast earnings CAGR of 23.3% for 2006-2009 compares to the consensus estimate of 22.8%.
• Limited impact from ABS/CDOs: There was a limited impact from the € 3.4bn ABS CDO portfolio on the results, with the bank reiterating that it has zero exposure to the US mortgage market. Mark-to-market losses were € 30.2m (pre-tax) via the P&L and € 81.1m via the balance sheet in 2007.
• Strength of Ceska Sporitelna (and CZK) partially offsets weakness of BCR (and RON): The depreciation of the RON (-10.9% versus € since end-September) and rising interest rates in Romania have negatively affected both our earnings forecasts and valuation. However, this has been partially offset by the strong performance of Ceska Sporitelna and the CZK (+9.8% versus € since end September).
• Relative value: In a battered banking sector, we believe is relatively undervalued, trading on a 2008F P/E of 7.9x, at a premium of 4% to the FTSE Eurofirst 300 banks index (7.6x, based on consensus estimates), which fails to fully value the high growth potential of the bank’s operations in Emerging Europe. Historically, has traded at a premium of more than 30% to the FTSE Eurofirst 300 banks index and we expect it will again. Trading at a 28% discount to its regional peers, we also believe offers relative value within the CEE sector.
Results overview and forecast changes
With demonstrating its resilience to adverse conditions in international markets in 4Q07, a review of our earnings forecasts has resulted in relatively minor adjustments. Net earnings for 4Q07 came in at € 336.8m, up 23.9% q/q and 21.6% y/y, in line with our forecast of € 334.0m and the consensus estimate of € 330.0m (with a range of € 292m - € 371m, according to Reuters). Earnings quality was solid (with positive and negative one-off items offsetting each other) and, with a full-year net profit of € 1,174.7m (+26.0% y/y), achieved its target for earnings growth of at least 25%. As expected, management once again reiterated guidance for earnings growth of at least 20% in 2008, and 25% in 2009. The depreciation of the RON and rising interest rates in Romania have negatively affected both our earnings forecasts and valuation. However, this has been partially offset by the strong performance of Ceska Sporitelna and the CZK. Overall, our net earnings forecast has been adjusted slightly downwards by 0.5% to € 1,416.0m (+20.5% y/y) for 2008 and 1.4% to € 1,747.1m (+23.4% y/y) for 2009.