Komercni’s Cejka Sees Low Rates as Risk to 2014 Guidance

Komercni Banka AS, the Czech unit of Societe Generale SA, sees rising risks to its full-year guidance as borrowing costs in the second quarter continued to fall, Chief Operating Officer Pavel Cejka said.

“The further fall of 10-year interest rates and a 1.6 percent yield on 10-year government bonds is definitely not a good sign,” Cejka said in an interview in Prague. “It has an adverse effect on our results as we invest our surplus liquidity with lower yields, so the risks of changing the guidance is now rather on the negative side.”

The Czech central bank left its benchmark interest rate at 0.05 percent for a 12th meeting on May 7. The policy makers also reiterated they won’t let the koruna “strengthen too much” beyond 27 per euro. The central bank raised its forecast for this year’s economic growth to 2.6 percent from 2.2 percent and upgraded it to 3.3 percent in 2015 from 2.8 percent.

“We assumed that in the middle of the year, 10-year state notes would yield some 2.5 percent -- now it fell to 1.6 percent, which is quite a gap,” Cejka said. “The growth is coming but it will be later in time.”

Komercni fell 78 koruna, or 1.7 percent, to 4,652 koruna in Prague, the biggest slump in about five weeks based on closing prices.

Loan Volume

The lender said on May 7 it expects its net interest income to grow 0.6 percent from a year earlier. Komercni also said total revenue should decline 1 percent this year, while total loan volume should advance between 3 percent to 5 percent from a year earlier.

“There’s a possibility they may revise the guidance as Czech banks invest most of their surplus liquidity in Czech state notes,” Milan Lavicka, an analyst J&T Banka AS in Prague, said by phone. “If yields remain this low, it’s clear that it will hurt them.” He has a “hold” recommendation on Komercni’s stock.

Erste Group Bank AG, the owner of Czech unit Ceska Sporitelna AS, fell 15.9 koruna, or 2 percent, to 698.4 koruna in Prague, the biggest drop in about a month, based on closing prices.

Komercni will provide more details on 2014 guidance on Aug. 1, when it publishes the results.

The bank still expects corporate lending to pick up in the second half of the year, though there haven’t been signs of an acceleration in business lending yet, Cejka said.

Komercni is seeing “high single digit” mortgage lending growth and an increase in consumer credit for the first time in five years, according to the executive.

Interest Rates

The company’s net interest margin also remains under pressure because of low interest rates and Komercni expects a “slight” decline in the second quarter from 2.6 percent reported in the first quarter.

The lender is also considering making changes to its capital structure under the new Basel III regulations and capital requirements, which would allow Komercni to raise the dividend payout to shareholders, according to Cejka.

“We will be discussing it with the regulator and Societe Generale, but first we have to wait for the legislation to be in place,” Cejka said. “If this was to happen, we would raise the dividend payout ratio, rather than provide any super-dividend to investors.”

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