Komercni banka yesterday announced that its board of directors has revised its estimate for the creation of specific provisions for full-year 2000. Following the advice of an auditor, KB now expects to create CZK 9.6 bil. of net provisions, vs. the previous official projection of CZK 7.6 bil. The bank had suggested several times in the past that its original CZK 7.6 bil. projection could be exceeded, and gave CZK 9.5 bil. as the upper limit of provisioning this year. The new CZK 9.6 bil. projection represents the upper end of the range, and, as such, should not necessarily be seen as bad news. The bank nonetheless said that its provisioning estimates will be revised further in the course of the year. KB’s board did not comment on the expected year-end result (we expect a CZK 1 bil. loss).
KB also announced that it seeks to have general reserves at the end of the year in the range of 3-4% of standard loans, or some CZK 4.5 bil.–6 bil. KB had CZK 9.6 bil. of general provisions at the end of June (a result of the February state bailout), and the planned release of general provisions in the second half of the year will ease the impact of new provisioning. However, the target year-end level (of general provisions of CZK 4.5 bil.–6 bil.) is slightly higher than we have assumed in our projections (CZK 4 bil.), implying that KB will likely use the cushion of general-provisions less than we expected (i.e., implying higher net provisions in 2000). This explains most of the difference between the CZK 9.6 bil. net provisions forecast by KB and our projection of CZK 8.8 bil. for 2000.
The stock reacted surprisingly to the news and rose 2%, but later corrected and closed up 0.8% at CZK 900. Predicting the short-term course of the volatile KB stock price is impossible. Although our twelve-month target price is CZK 955, we continue to consider the stock’s short-term valuation stretched at the current price.
(Ondřej Daťka)