BZ WBK is due to report 4Q05 results on February 22. We expect the bank to report net earnings of PLN116.6m for 4Q05, down 11.6% q/q but up 20.6% y/y (IFRS/PAS). This implies net earnings for the full-year 2005 of PLN 528.7m, which is slightly below the recently upgraded consensus forecast of PLN 530.6 (source: Multex). The decline in earnings this quarter is expected to be mainly driven by higher net provisioning requirements (the potential for which we have already flagged as a headwind to prospective earnings growth) as well as rising operating costs.
Net interest income is expected to come in at PLN 236.7m, up 1.6% q/q in 4Q05 and 6.8% y/y. We would expect to see margin pressure, driven by the continuous fall of interest rates in Poland, with 3m-average WIBOR was down 85bp to 4.38% in 2H05. However, we expect a lower adjustment for FX swaps to be an offseting factor. Unfortunately, lending flows are also not encouraging, with BZ WBK missing its target for mortgage portfolio growth, reporting an increase of just 10.2% to PLN 701.9m for the full-year (6.9% below the management target of PLN 750m).
Net fee income is expected to maintain momentum, coming at PLN 195.6m for 4Q05, +27.1% y/y and +9.9% q/q. BZ WBK has been outperforming the market, on its mutual fund business, growing its AUM at a high pace of 47.6% q/q in 4Q05 (with the annual growth rate reaching 172.2% y/y), while the market grew by 14.9% q/q and 60.5% y/y. We have raised our full-year estimate for net fees by 4.3% to PLN 685.9m (7.7% y/y IFRS/PAS) for 2005 and by 3.6% to PLN 735.5m (+7.2% y/y) for 2006.
Operating costs are expected to come in at PLN 310.3m for 4Q05, up 8.8% q/q and 6.3% y/y. Costs have generally been contained this year but we see a rise this quarter, due to both seasonal factors (mainly accruals for bonuses) and a rise in non-staff costs (ex-depreciation) (i.e. outsourcing costs). We have revised upwards our full-year estimate for operating costs (incl. depreciation) by 2.3% to PLN 1,163.6m (1.6% y/y IFRS/PAS) for 2005 and by 2.1% to PLN 1,192.0m (+2.4% y/y) for 2006.
Net provisioning requirements are forecasted to come in at PLN 33.3m in 4Q05, nearly double the exceptionally low level reported in 3Q05 (annualized 16bp of average assets). We continue to expect a rising net provisioning requirement to weigh on earnings growth.
Effective tax rate is expected to come in at 23.7% for 4Q05, higher than the 21.5% level of 3Q05, but translating into a full-year tax rate of just 19.7%. Note that our expectation for a higher effective tax in the fourth quarter versus a statutory rate of 19% reflects management guidance on quarterly reporting trends.
Our fair value of PLN 122.6 represents 23.1% downside to the stock price of PLN159.5. The stock trades at 2006F P/E of 21.2x, which puts BZ WBK at a 33.7% premium to the CEE sector of 15.8x. We maintain our Sell recommendation, given the fact that the above mentioned fair value already factors in a rise of the bank's dividend payout ratio to 80%.