Erste Group Bank AG, the Austrian bank earning most of its income in eastern Europe, plunged as a bad-debt clean-up forced by Romanian regulators and fee refunds in Hungary will cause a record loss this year.
Erste, which owns the second-largest Hungarian and the biggest Romanian bank, will post as much as a 1.6 billion-euro ($2.2 billion) loss this year as bad-loan provisions will rise 40 percent more than forecast earlier and trigger additional writedowns, it said in a statement yesterday. The shares fell 16 percent to 19.52 euros in Vienna as of 3:37 p.m., the lowest level in almost a year.
“This is a clearly bad surprise as it comes in addition to the already ‘badly surprising’ warning issued by the group at the beginning of this year,” Natixis Securities SAS analyst Steven Gould said in a note to clients. “These announcements hurt the management’s credibility going forward.”
Erste, the third-biggest bank in eastern Europe after UniCredit SpA and Raiffeisen Bank International AG, invested in the former communist bloc in the past decade, seeking higher growth and profit than available in its domestic market. That bet turned sour in Hungary and Romania after 2009 when the economic downturn caused borrowers to miss repayments.
The provisions are caused by new rules due to be approved by Parliament in Hungary today, forcing banks to refund “unfair” loan fees, and by the Romanian central bank’s push for faster bad-debt reduction amid the European Central Bank’s bank health check, Vienna-based Erste said. Writedowns on goodwill and deferred tax assets, triggered by the loan-loss provisions, may reach as much as 1 billion euros.
“By taking these measures, we have done everything in our power to avoid one-off effects from 2015 onward,” Chief Executive Officer Andreas Treichl said in the statement. “We are convinced that these measures will also help us pass the asset-quality review and stress test comfortably.”
The loss won’t hit Erste’s regulatory capital to the full extent, and the bank’s common equity Tier 1 ratio will reach about 10 percent by the end of the year without raising fresh capital, Erste said. That’s because goodwill, brand value and other intangible assets of its Romanian unit that Erste is writing down aren’t part of the regulatory capital.
The bank expects a return to profit and a return on tangible equity of 8 percent to 10 percent next year, Erste said. This equals net income of 700 million euros to 900 million euros, according to Francesca Tondi, an analyst at Morgan Stanley. The new guidance will “result in near-term pressure for the stock and potentially cap its upside for some time,” she said in a note.
Hungary contributed to Erste’s loss with a new law forcing banks to repay some loan costs to customers. The law, approved by Parliament in Budapest today, will require banks to refund certain expenses on as much as 6.5 trillion forint ($28 billion) of loans going back as far as 10 years.
Hungary’s mostly western-owned banks have lost billions of euros since 2008 because of foreign-currency mortgages and loans they gave to households. The Hungarian forint’s plunge led to soaring repayments and defaults on mostly Swiss-franc denominated credit, which became widespread last decade as clients sought lower interest rates.
The central bank estimates the law will cost banks as much as $4 billion, dwarfing losses of about $1.7 billion that Prime Minister Viktor Orban imposed three years ago. Erste trails OTP Bank Nyrt in total assets in the country neighboring Austria, where KBC Groep NV, Bayerische Landesbank, Raiffeisen and Intesa Sanpaolo are also among the top 10 lenders.
“The market is severely complacent and arguably underestimating some of the disruptive impact the proposed path will have on the banks in the short to medium run,” said Peter Attard Montalto, a London-based economist at Nomura International Plc.
Provisions will soar by even more in Romania, the Black Sea country of 20 million where Erste bought Banca Comerciala Romana SA for 3.75 billion euros in 2005, six times its book value at the time. They are caused by the central bank’s pressure on banks to clean up their balance sheets as part of the ECB’s bank health check, Erste said.
The Romanian measures will cause bad-debt charges to fall to 1 percent to 1.5 percent of gross loans next year, from more than 4 percent in the first quarter. The stock of bad loans will decline by 800 million euros, or 25 percent, this year.
Treichl, the longest-serving CEO of a major European bank, told Austrian radio in an interview that he didn’t rue having invested in Hungary and Romania and thought he was still the right head for the company.
“Yes, we’re having problems in some countries,” he told the Oe1 radio station. “But there will be times again when our shareholders will be glad that we’re in Hungary and Romania.”