Erste Rises as Eastern Bad Debt Relief Prompts Dividend Pledge

  • Bank raises guidance for this year, sees 10%-11% return 2016
  • Management sees 40c-50c dividend after pausing last year

Erste Group Bank AG, Austria’s biggest bank, said profit will be at the upper end of its guidance this year and rise further in 2016 and promised to pay a dividend again as lending grows and bad debt shrinks. Its shares soared the most since August.

Erste’s return on tangible equity will be about 10 percent this year and rise to as much as 11 percent in 2016 as eastern Europeans borrow more and fewer loans are overdue, the Vienna-based bank said in a statement on Friday. Chief Executive Officer Andreas Treichl told analysts his management board would recommend resuming dividend payments at up to 50 cents per share after skipping the 2014 payout due to a record loss.

“We would like to pay a dividend to shareholders for a year that we believe will be a pretty good one,” Treichl said on a conference call. “That’s what we would propose from the current point of view, unless something dramatic happens in the rest of the year, which we don’t expect.”

Treichl, 63, who took Erste into eastern Europe when he became CEO in 1997, is starting to reap the gains of a severe balance-sheet clean-up last year. The third-biggest bank in eastern Europe after UniCredit SpA and Raiffeisen Bank International AG, Erste is now betting on a return to profit in Hungary and Romania adding to its profitable Czech and Slovak businesses.

Core Markets

Shares rose as much as 6.5 percent in Vienna, trading 6.1 percent higher at 27.47 euros by 12:40 p.m., the biggest increase since Aug. 25. It was the best performer in the Euro Stoxx Banks index today, followed by Austrian peer Raiffeisen.

Erste reported third-quarter net income of 277 million euros ($301 million) on Friday, compared with a loss of 554 million euros a year earlier. That beat all of the 19 analyst estimates collected by the company, whose median was 216 million euros.

“Most of our core markets showed robust economic growth this year and our subsidiaries further improved their results, with Austria, the Czech Republic and Slovakia remaining the pillars of our profitability and Romania quickly catching up,” said Treichl, whose tenure was extended to 2020 in September.

Erste skipped its dividend last year as it posted a record 1.44 billion-euro loss. It had paid 20 cents per share for the 2013 business year in 2014. The Bloomberg Dividend Forecast for 2015 is 50 cents.

Interest Income

Bad-loan provisions fell to 144 million euros, or 0.44 percent of gross loans, which Treichl said was the lowest level in at least nine years. A 145 million-euro one-time loss on Croatian Swiss-franc mortgages in the quarter won’t be booked in this category, which means risk charges will fall to 750 million euros to 950 million euros in the full year, down from 2.2 billion euros in 2014.

Net interest income, the bank’s biggest source of revenue, declined 1.2 percent to 1.11 billion euros as the low interest rates in the region depressed margins. That was still slightly ahead of the analysts’ estimates as performing loans grew 4 percent, driven especially by Austria and the Czech and Slovak republics.

Erste’s core equity Tier 1 capital ratio based on the full application of Basel III rules rose to 11.6 percent of risk-weighted assets, calculated including the retained earnings for the first nine months, from 11.3 percent at the end of June.

The bank had previously forecast return on tangible equity of 8 percent to 10 percent. Based on its tangible equity of 8.4 billion euros at the end of last year, the new guidance at the top of this range implies full-year net income of around 840 million euros. The rate for 2016 will be calculated on a higher level of equity, Treichl said.

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