Erste Foresees Cost-Cutting Amid Eastern Europe SlumpBoris Groendahl
Erste Group Bank AG will rely on cost cuts and lower bad debt charges to balance declining lending revenue this year as central and eastern European economies are mired in slow growth.
Erste returned to profit, reporting 483.5 million euros ($636 million) in net income last year after a 719 million- euro loss in 2011, it said in a statement today. The bank will cut costs and reduce loan-loss provisions at least 10 percent to compensate for revenue lost on lackluster credit demand.
“Overall growth in central and eastern Europe will not be sufficient in 2013 to really fuel loan growth,” Chief Executive Officer Andreas Treichl told analysts on a conference call today. “We expect maybe later in 2013 and in 2014 to see a stronger performance on the lending side.”
Erste, smaller than only UniCredit SpA and Raiffeisen Bank International AG among banks operating in Europe’s ex-communist bloc, has promised investors to bolster earnings this year partly by making its debt-ridden Romanian unit profitable again. A shrinking economy has pushed more than a quarter of Erste’s loans in Black Sea country into delinquency.
Erste shares climbed 3.5 percent to 24.58 euros at 2:54 p.m. in Vienna, giving the bank a market value of 9.7 billion euros. It was the best performer in the 40-company Bloomberg Europe Banks and Financial Services index.
The bank’s revenue declined by 3.3 percent last year, driven by lower interest income, while it cut costs by 2.4 percent. The operating result fell 4.3 percent to 3.47 billion euros. Treichl didn’t provide detail about how he plans to cut cost this year outside of Romania, where the bank has already begun cutting jobs and closing branches.
Loan-loss provisions of 1.98 billion euros last year, almost half of which were caused by Erste’s Romanian and Hungarian units, will decline by a “double-digit percentage” in 2013, driven by a reduction in Romania, Erste said.
Treichl said the reduction rate would be “closer to 10 percent than to 99 percent” and declined to be more specific. Reaching the 18 percent decline that analysts estimate on average, according to Erste’s website, would be “pleasing,” he said.
“Erste is guiding the market to expect a risk cost decline that is smaller than what the market expects,” said Eleni Papoula, a banking analyst at Berenberg Bank in London. “When people start looking up those numbers they will see that Erste is much more cautious.”
Erste will resume dividend payments at 40 cents a share after suspending payments last year, it said. The Bloomberg Dividend Forecast was for a dividend of 35 cents a share. Erste had paid 70 cents a share from 2010 profit.
Core Tier 1 capital, a measure of financial strength, rose to 9.6 percent of risk-weighted assets at the end of 2012 from 7.8 percent the previous year, when stripping off state aid and other forms of capital injections that are being phased out by regulators, Erste said.
Treichl said he now “feels very comfortable” with the bank’s capital position and would be able to repay 1.24 billion euros of state aid the bank received in 2009 “any time.” He declined to say when he planned to repay that capital.