Net interest margin (NIM) should remain unchanged at 2.90% in Q4. The bank expects a loss of 160 mln. CZK from revaluation of its derivatives portfolio as the bank recalibrates its models to satisfy IFRS standards and good market practice. (43,79 EUR, -1,22%) banking income in 2013 should thus decline by some 5.8% (previously expected 6.0%). Operating costs should decline by 2.5% for the full year. As for cost of risk, provisions should increase to 45-50 bps in Q4 (or 500-600 mln. CZK) as the bank expects higher provisions for some isolated corporate cases and 100 mln. CZK related to recalibration of retail provisioning models.
Outlook has not change much since last conf call, higher cost of risk indicated for Q4 may be slightly negative, but overall cost of risk in 2013 should be at record low. We estimate them at 39 bps of total exposure compared to 41 bps in 2012.
Outlook for 2014
NIM is expected to remain stable or slightly better in 2014. Reinvestment of “free funds” at lower rates should continue to put pressure on NIM from deposits despite slightly higher long-term rates. Net interest income should, however, increase by some 2% y/y, driven by loan volume. The bank expects some pick up in lending next year, loan volume may grow by some 6%. Revenues from fees & commissions should decline in 2014. banking income could thus increase by less than 1%. On the other hand, opex may also decline by less than 1%. As for cost of risk, there is no potential for further decrease next year according to (4690 CZK, -2,49%). The bank targets cost of risk at 50 bps in 2014.
As expected, the outlook sounds conservative. At the operating level our estimates meet KB’s guidance, however, we expect lower cost of risk next year (at 45 bps).
Capital adequacy and dividend policy
KB’s Tier 1 ratio (according to Basel II) currently stands at 16.7%. Basel III requirements could have negative impact on Tier 1 roughly 100 bps. The national bank will require from to keep the ratio at 14.0% according to Basel III as of 2014 and plans to keep additional 1.0 ppt above the CNB’s target. This allows to payout 70% of its net income next year, at the upper end of guided 60-70% range.
As expected, meets CNB’s capital requirements. We estimate that has an excess capital of CZK 160/share above CNB’s criteria, or roughly CZK 65/share above its internal target. We do not expect the bank will pay any extra dividend above 70% of net income. Payout ratio of 70% is reasonable for in coming years. We increase our dividend estimate for 2014 to CZK 230/share from CZK 210/share.
Overall, KB’s comments on future outlook sound rather conservative. Payout ratio shift to the upper end of 60-70% range is positive, however, potential to increase payout ratio further above 70% is limited, in our view.