Erste Cuts Profit Outlook on Hungary, Romania Loan Losses

Erste Group Bank AG said bad loans in Hungary and Romania will remain a drag on profit for longer than it predicted after they cast a pall over first-quarter results at eastern Europe’s second-biggest lender.

Bad debt charges will be about 2 billion euros ($2.7 billion), or about 10 percent more than it predicted Feb. 29, as asset quality continues to worsen in Hungary and Romania, the Vienna-based lender said in slides prepared for an analyst meeting in London today. That also means operating profit will be only stable this year, rather than rising “slightly” from 3.63 billion euros in 2011.

“We are slightly more cautious on the income side and on the risk-cost side,” Chief Executive Officer Andreas Treichl told analysts in a conference call. Asset reductions the bank has made to improve its capital ratios will cut revenue and contribute to the lowered profit forecast, he said.

Like other banks operating in the former communist part of Europe such as market leader UniCredit SpA and Raiffeisen Bank International AG, Erste is betting that risk costs in the region will come down and boost profit. Hungary, where Erste owns the second-biggest bank, and Romania, where its unit is the biggest, are holding back that recovery. In both countries, about one in four loans on Erste’s book is delinquent. The bank had its first loss since at least 1988 last year because of writedowns there.

Charges Quadruple

Erste’s bad debt charges more than quadrupled from 2007 to 2009, when they first crossed the 2 billion-euro mark. The new guidance means they could remain above that level for the fourth straight year.

“When we had that for the first time in 2009, it looked like a one-off,” said Dirk Becker, an analyst at Kepler Capital Markets, with a buy rating on Erste. “It’s 2012 now and we’re still there. That’s not so great.”

Erste climbed 1.6 percent to 17.395 euros at the 5:30 p.m. close of Vienna trading, beating the 43-member Bloomberg Europe Banks and Financial Services Index, which was down 1 percent. It remains one of the index’s top 10 performers this year as it advanced 28 percent.

“That’s still the main story for Erste, and indeed for Raiffeisen,” Becker said. “At some point asset quality deterioration will relax and they can write back provisions. That is going to happen at some point, but not this year.”

Buybacks Helped

Erste’s net income rose 8 percent to 346.5 million euros in the three months ended March 31, helped by a 250.6 million-euro pretax gain from hybrid-bond buybacks that more than canceled out the Romanian and Hungarian loan losses. That beat the average estimate of a drop to 302 million euros in a Bloomberg survey of 13 analysts. Erste said it will have another buyback gain of 160 million euros this quarter.

Risk provisions rose 26 percent to 580.6 million euros, more than the 22 percent rise analysts in the Bloomberg survey had estimated. The bank booked extra charges on corporate and real estate loans in Romania, and on Hungarian foreign-currency mortgages. Erste had predicted Feb. 29 that 2012 charges would decline to 1.8 billion euros from 2.27 billion euros last year.

Erste exceeded the 9 percent capital goal determined by the European Banking Authority, reaching a core Tier 1 ratio as defined by EBA of 9.7 percent. It has to reach that target by June 30. Excluding state aid and other non-voting capital, the core Tier 1 ratio stood at 8.6 percent, up from 7.8 percent three months earlier.


Before it's here, it's on the Bloomberg Terminal. LEARN MORE