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Erste Says Bad Debt Persists Amid ECB Review; Shares Drop

Erste Group Bank AG (EBS), Austria’s biggest bank, expects operating profit to miss estimates this year as it sets aside provisions for bad loans amid a European Central Bank asset review. The shares slumped the most in seven months.

Erste expects pre-provision operating profit to remain little changed in 2014 at around 3.1 billion euros ($4.2 billion), the Vienna-based company said in a statement. That compared with an average estimate of 3.43 billion euros, according to the company’s own survey of 26 analysts published on its website.

“The outlook statement for 2014 is clearly a negative surprise,” analyst Michael Dunst at Commerzbank AG in Frankfurt said in an e-mailed report to clients. “We reiterate our reduce recommendation.”

Erste in among about 128 banks subject to an asset quality review by the ECB this year as Europe’s leaders seek to ensure there is no repeat of a swathe of taxpayer-funded bailouts that followed the 2008 financial crisis. The bank focuses its operations in central and eastern Europe, where several economies remain mired in recession.

The bank’s shares fell as much as 8 percent in Vienna trading, the biggest decline since June 24. They fell 6.4 percent to 26.81 euros at 10:07 a.m., valuing the company at 11.5 billion euros.

Bad Loans

Bad debt provisions will be about 1.7 billion euros this year, Erste said. That compares with an average analyst estimate of 1.4 billion euros. Provisions of 1.763 billion euros in 2013 consumed more than a third of Erste’s net interest income.

“Erste Group anticipates a slow start to the year but aims to keep operating profit stable,” the bank said. “In light of the upcoming ECB Asset Quality Review, Erste Group does not expect a decline in risk costs beyond 5 percent.”

Chief Executive Officer Andreas Treichl is struggling with declining revenue and Erste is cutting costs and relying on improving credit quality to counter income weakness.

Erste, which owns the biggest banks in the Czech Republic and Romania and the second-biggest lender in Hungary, said net customer loans won’t grow or shrink by more than 2 percent, remaining at about 120 billion euros this year.

The bank proposed to pay a dividend to shareholders of 20 cents per share from 2013 profit compared with 40 cents a year earlier. The Bloomberg dividend forecast was 25 cents. Erste’s net income fell to 61 million euros ($84 million) compared with 483.5 million euros a year earlier, it said on Feb. 11.

Profit last year was hurt by previously announced goodwill writedowns of 383 million euros on Erste’s Romanian and Croatian units last year. The bank also can’t realize as much in tax losses as before because banking levies in Austria, Hungary and Slovakia reduced its taxable income, it said.

Austria introduced a banking levy in 2011 to force lenders to contribute to bank bailouts. The charge is due to rise to about 640 million euros this year.

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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