Erste Rises as Romania Prompts More Upbeat Profit Outlook

Erste Group Bank AG expects results to improve next year after the “stabilization” of its Romanian business helped eastern Europe’s third-biggest lender return to profit in the last quarter.

Erste rose the most in six weeks in Vienna trading after Chief Executive Officer Andreas Treichl said a turnaround in Romania will boost profit next year. The bank posted third-quarter net income of 143.7 million euros ($186 million), matching the average estimate of 13 analysts surveyed by Bloomberg, after a year-earlier loss of 1.5 billion euros.

“Whereas we’re by no means bullish about what’s going to happen in 2013, we’re quite firm that we will see a further improvement of our results,” Treichl said. “I can’t assure you that things are going to be extremely happy-dappy over the next 12 months, but in relative terms we feel quite comfortable.”

Erste posted its first loss last year since at least 1988 after bad-loan charges, credit-default-swap losses and writedowns in Romania and Hungary, where it owns the largest and second-biggest banks respectively. While the lender expects Hungary to remain in the doldrums, Erste outlined a plan to ensure its Romanian business returns to profit next year.

Erste climbed 6.3 percent, the most in six weeks, to 19.07 euros a share in Vienna, making it the best performer on the 38-company Bloomberg Europe Banks and Financial Services Index. The stock has advanced 40 percent this year, more than double the 16 percent gain of the index.

‘More Upbeat’

“Erste became somewhat more upbeat with regards to the outlook, as now it expects only a slight decline in operating profit compared to last year,” Gabor Kemeny, an analyst at Concorde Securities, said in a note to clients.

Erste expects 2012 operating profit to be “only slightly behind” last year’s 3.63 billion euros, a wording that Treichl said was intended to highlight the more upbeat mood. The bank had lowered the guidance for operating profit in both July and April.

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 Banca Comerciala Romana for 3.75 billion euros. He hired new management this year as losses widened in the Black Sea country, where more than a quarter of Erste’s lending is delinquent.

“We’re seeing results coming in,” Treichl said. “The trends have been so stable during past months that we now feel a lot more comfortable saying that the worst is over.”

Romania Story

Erste laid out a four-pronged “road to profitability” in Romania in slides prepared for a meeting with investors in London today. The bank plans to reduce loan losses “significantly” next year, after they shaved 560 million euros off earnings in the first nine months of 2012 -- equivalent to more than a third of total provisions. It also plans to increase revenue, cut costs and stop lending in euros to unhedged retail clients.

“They are trying to push the Romania story, the outlook is a bit better than what I expected,” said Ronny Rehn, an analyst at Keefe, Bruyette & Woods in London, who rates Erste market perform. “It looks like it might get better a little quicker.”

Treichl expects the cost-income ratio, a measure of bank profitability, to improve next year as revenue rises, costs decline and margins increase. The board expects to propose resuming dividend payments for 2012 after scrapping them last year.

Loan Losses

The bank reiterated that loan losses would be about 2 billion euros. Bad debt was unchanged at 9.2 percent of all loans in the third quarter from the preceding three months as reductions in Austria and Slovakia offset increases in Romania and Croatia. Delinquent loans in Hungary remained at 25 percent, halting a four-year expansion.

Erste’s core Tier 1 capital, a key measure of financial strength, was also unchanged at 8.8 percent of risk-weighted assets, once government aid and other non-voting capital is stripped out. Including state aid, which Treichl said he won’t repay before 2015, the ratio stood at 10.4 percent.

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