Deputy finance minister Mladek said yesterday that KB’s privatization should be completed in the third quarter at the latest. A Czech representative of Goldman Sachs, the privatization advisor, expects the transaction to be closed in June or July. Given that the government deadline for selecting a tender winner is end of June, the transaction completion dates above are acceptable and nothing new for the stock.
KB yesterday released detailed audited 2000 IAS results. Operating results did not reveal anything unexpected. A breakdown of some of revenue items suggests that the turnaround in H2 2000 (particularly in fees and commissions) is sustainable as it is based on a growing customer base and a new fee structure rather than on one-off gains. Our prediction of a CZK 9.6 bil. operating profit in 2001 may seem a bit conservative in this light.
A year-end balance sheet cleanup resulted in a massive reclassification of loans towards non-performing loans (NPL’s including substandard, doubtful, and loss classifications). Their nominal value grew from CZK 27 bil. in September to CZK 50 bil. by the end of the year, and they now represent 33.7% of total nominal customer loans.
This is not as bad as it seems given that all these NPLs are included in the state-guaranteed portfolio (the rest are balance-sheet assets other than loans and off-balance-sheet assets). The nominal value of the guaranteed portfolio is CZK 60.9 bil., its net value (after subtracting specific provisions of CZK 11.3 bil.) is CZK 49.6 bil. Although it is still uncertain how much value KB can recover in the next three years, the presence of state guarantees up to CZK 20 bil. and the value of collateral backing these assets (CZK 35.7 bil. after revaluation) significantly diminish the risks to KB’s earnings. Furthermore KB still has CZK 7.0 bil. in general provisions left as a cushion despite using some general provisions at the end of last year.
KB says its net 2001 provisioning in will be high but not as heavy as in 2000 when it was CZK 7.9 bil. Given the above, we are comfortable with our forecast of a CZK 3.95 bil. net provisioning for this year. We therefore do not change our forecast of a CZK 4.3 bil. after-tax income and our KB valuation. We keep our target price of CZK 1,095 per share, and – given the limited implied upside from the current price – we also keep our hold recommendation.
(Ondřej Daťka)