Erste Profit Misses Estimates on Central Europe Loans

Erste Group Bank AG (EBS), eastern Europe’s third-biggest bank, reported first-quarter profit that missed analyst estimates as weak credit demand and low rates contributed to a decline in interest income. The shares fell.

Net income dropped 49 percent to 176.2 million euros ($230 million) as gains from hybrid bond buybacks a year earlier weren’t repeated and net interest income, Erste’s biggest revenue source, fell by 7.2 percent, the Vienna-based bank said in a statement today. The profit compared with a median 185 million-euro estimate in a Bloomberg survey of 11 analysts.

“This is a solid result against the backdrop of limited economic growth and continuously declining interest rates,” Chief Executive Officer Andreas Treichl said in the statement. “The improvement in the performance of our Romanian subsidiary is especially remarkable,” he said, adding that it was “close to break-even.”

Erste, trailing only UniCredit SpA (UCG) and Raiffeisen Bank International AG (RBI) among banks operating in Europe’s ex-communist bloc, has promised investors to bolster earnings this year, mostly by making its debt-ridden Romanian unit profitable again. A shrinking economy has pushed almost a third of its loans in the Black Sea country into delinquency.

Shares Decline

Erste shares fell 0.6 percent to 23.98 euros at 10:21 a.m. in Vienna. The 40-member Bloomberg Europe Banks and Financial Services Index rose 0.8 percent. Erste trades at 0.70 times book value, less than the 0.83 average of the Bloomberg index’s members.

The bank paid six times book value when it agreed to buy Banca Comerciala Romana, the nation’s biggest lender, for 3.75 billion euros in 2005 and has made several writedowns since.

Net interest income, the difference between the interest the bank charges borrowers for loans and what it pays for deposits, declined to 1.24 billion euros from 1.34 billion euros a year earlier.

The loan book shrank 1.2 percent in March from the end of last year to 130.3 billion euros, driven by Hungary, the neighboring country to Austria mired in recession where Erste owns the second-biggest bank. The sale last year of financial assets that are not part of its main business also weighed on Erste’s interest income.

Treichl said in February that he will cut costs and lower provisions for bad debt in the entire group by at least 10 percent to offset declining lending revenue, as growth slowed in central and eastern Europe.

General administrative expenses declined by 1.5 percent in the first quarter from a year earlier to 931.2 million euros, after job cuts in Romania and Hungary lowered the payroll.

Romania Improvement

The net loss of Erste’s Romanian business narrowed by 95 percent to 3.6 million euros in the three months to March, helped by a 42 percent reduction in bad debt charges, Erste said. Delinquent loans as a share of total lending in the country still increased and stood at 30 percent, mostly because the loanbook shrank.

The better performance in Romania helped reduce loan-loss provisions for the entire group. They declined by 31 percent in the first quarter from a year earlier to 402.2 million euros, slightly better than analysts had forecast. They dropped 22 percent from December.

“Provisions are better than expected mainly due to Romania, which may offset the market disappointment on weaker net interest income,” Eleni Papoula, an analyst at Berenberg Bank in London who recommends selling Erste shares, said by e- mail.

Fifteen of 30 analysts recommend buying Erste’s shares, with three saying sell them, according to data compiled by Bloomberg. The average 12-month price estimate is 26.32 euros.

To contact the reporter on this story: Boris Groendahl in Vienna at bgroendahl@bloomberg.net

To contact the editor responsible for this story: Frank Connelly at fconnelly@bloomberg.net

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