Erste Group Bank AG, eastern Europe’s third-biggest western lender, cut its outlook for the second time in three months after its money-losing Romanian unit caused a 46 percent drop in second-quarter profit.
Operating results will “stay somewhat behind” last year’s level because of lower revenue from lending and fees, the Vienna-based bank said in a statement today. It last reduced its forecast April 30, when it said profit on that basis would be “stable” after 3.63 billion euros ($4.5 billion) in 2011, instead of rising.
“We have revised our forecast slightly downwards this year,” Erste Chief Executive Officer Andreas Treichl told analysts in a conference call today. “The main reason for this is that the environment, the macro trends in our region have deteriorated again. We now have two countries in the region, the Czech Republic and Hungary, with a slight contraction.”
Romania, where Erste owns the biggest bank, Banca Comerciala Romana, and Hungary, where it owns the second-biggest, last year caused Erste’s first loss since at least 1988 and are holding back the group’s profit recovery. In both countries, about one in four loans on its book are delinquent, due to bad loans for real estate and to mortgages denominated in foreign currencies. Credit is shrinking in Hungary, where the economy is contracting this year, and stagnant in Romania, which entered the second recession in three years in the first quarter.
Erste fell 3.6 percent to 14.73 euros at the 5:30 p.m. close in Vienna, snapping four days of advances. It was one of the worst performers in the 43-member Bloomberg Europe Banks and Financial Services Index, which declined 2 percent. Erste trades at less than half its book value, according to data compiled by Bloomberg, undercutting the average of 0.65 for western European banks by a third.
Erste wrote 210 million euros off the value of Romania’s BCR in the second quarter, following a 700 million-euro writedown in October, and a fifth straight quarter of losses in the country. The unit’s bad debt charges will peak this year and cost cuts of 10 percent, or 40 million euros per year, will help it return to profit in 2013, Erste said. Treichl, who leads eastern Europe’s third-biggest bank after UniCredit SpA and Raiffeisen Bank International AG, paid six times book value when he bought BCR for 3.75 billion euros.
“Romania really is the key point,” Treichl said. “They are in a transformation. We’re extremely confident that it’s gonna work and we’re therefore also quite confident that the bank will return to profitability in 2013.”
Erste’s net income in the three months ended June 30 fell to 107.1 million euros, from 199.4 million euros a year earlier. That compares to an average estimate of 103 million euros in a Bloomberg survey of 10 analysts. The BCR writedown was partly offset by a 162.6 million profit from a hybrid bond buyback. Both items were reflected in brokerage estimates, according to data compiled by Bloomberg.
Today’s results are a “weak set of numbers even considering the already low consensus expectations,” Citigroup analysts Stefan Nedialkov and Simon Nellis wrote in a note to customers. “Given the downgrade of the outlook for 2012, we believe consensus earnings for 2012 may decline by 2 percent to 4 percent.”
Net interest income, fee and commission income and trading income all fell from a year earlier, adding to the pressure on profit. The 6 percent decline in net interest income was partly because Erste cut its risk-weighted assets by 4.4 percent to help meet capital requirements by the European Banking Authority over the last nine months, it said.
Bad debt charges declined 13 percent and were lower than what the analysts in the survey had expected thanks to an improvement in asset quality in Austria and in the Czech and Slovak republics, where Erste owns the biggest banks. The lender reiterated its forecast of a decline in loan-loss provisions to 2 billion euros this year, even as they will rise in Romania.
The expansion of bad debt accelerated again in the quarter, reaching 9.2 percent of all customer loans, compared with 8.8 percent three months earlier, driven by Romania, where the ratio of bad debt reached 26 percent, and by non-performing real estate loans.
Erste has overshot the EBA’s capital requirements, reporting core reserves of 9.9 percent at the authority’s June 30 deadline to reach 9 percent. Capital excluding government aid and other non-voting forms increased to 8.8 percent.