Bank Pekao is due to report 4Q05 results on February 21. We expect the bank to report net earnings of PLN 400.0m for 4Q05, down 1.1% q/q but up 17.6% y/y (IFRS/PAS). This is somewhat above the consensus forecast of PLN 392.3 m (according to PAP) and falls within a fairly wide range from PLN 361m – PLN 420m. The quarter-on-quarter decline, on our estimates, is due to a drop in net interest income (at PLN 603.3m in 4Q05 versus PLN620.5m in 3Q05) and lower net trading results (at PLN 97.9m in 4Q05 versus PLN102.4m in 3Q05).
Note that we have downgraded our full-year estimate for net income by 0.4% to PLN 1531.7m (+10.7% y/y) for 2005 and by 0.3% to PLN 1,646.0m (+7.5% y/y) for 2006.
Net interest income is expected to come in at PLN 602.8m in 4Q05, down 2.8% q/q but up 1.9% y/y. We expect that falling interest rates (3m-average WIBOR down 85bp to 4.38% in 2H05) should finally put pressure on the bank's liability spread. Moreover, according to bank guidance, the last two quarters were positive for bank’s interest income, as it experienced recoveries of overdue interest of some PLN 15-17m. However, we expect Bank Pekao to mostly offset the above-mentioned negative factors via the positive impact of higher $-interest rates and a pick-up in consumer loans, with an annualised growth rate of 20% for 2005.
Net fee income is expected to rise to PLN 413.6m in 4Q05, up by 1.1% y/y and 3.4% q/q. Pioneer Pekao Investment Management lost market share during 4Q05, down 2.4% at 31.4%, from 33.8% at 3Q05. Whilst a loss of market share is a negative indicator, it's worth noting that despite PPIM's strong base, it managed to grow its AUM at a pace of 17.2% in 2H05. Moreover, we expect Bank Pekao to benefit from a positive shift in the structure of its investment fund portfolio, from bond products towards higher-yielding balanced and equity funds.
Operating costs are expected to come in at PLN 590.0m in 4Q05, which is slightly down 0.5% y/y but up 1.0% q/q. Cost containment continues to be a strength of the bank, though incremental improvements now come on a smaller scale. However, we expect some revisions to the bank's budget for personnel costs, due to performance-linked compensation.
Net provisioning requirements are forecast to come in at PLN 60.6m in 4Q05, down 33.5% y/y and 5.0% q/q. We reiterate our positive view on the bank's more conservative approach towards provisioning levels versus its peers in the Polish banking sector. Bank Pekao has maintained a more-or-less normal run rate of 71 bp (annualised) over gross loans this year, whilst many other banks have reported unsustainably low levels.
We maintain our view that the merger of Bank BPH with Bank Pekao is probable, though the decision is seen to be delayed. With latest exchange of the letters between the EC and the Polish government, Poland’s appeal in the European Court of Justice against the EC decision, and the EC’s reply that this would not delay the merger, we believe UniCredito has a strong case. The next banking supervision commission meeting (expected to discuss the UniCredito case), due on March 8, should shed further light on the matter. Eyes should be also turned on the EC, which is now examining whether the 1999 Bank Pekao privatisation agreement is legal, after Poland joined the EU.
We reiterate that from a short-term trading perspective, Bank Pekao has suffered (as potential merger synergy appears in doubt or at least delayed), while Bank BPH has benefited (on speculation that minorities could benefit from the high price of a trade sale). In our opinion, these trading issues have already been priced in and, on valuation grounds, we reiterate our Buy rating on the stock, as well as our fair value of PLN 188 per share (including synergy from a merger with Bank BPH).