Erste Approaches Romanian Turnaround as Revenue Declines

Erste Group Bank AG, Austria’s second-largest bank, stemmed losses at its Romanian business in the first quarter, while economies in eastern Europe struggled to emerge from recession, hurting the group’s revenue.

The net loss in Romania, where Erste owns the biggest bank, narrowed 95 percent to 3.6 million euros ($4.7 million), the Vienna-based lender said in a statement today. The group’s net income dropped 49 percent to 176.2 million euros as gains from hybrid bond buybacks a year earlier weren’t repeated and revenue declined. That compares with a median 185 million-euro estimate in a Bloomberg survey of 11 analysts.

“Growth is too weak to talk about a recovery and it’s also too weak to result in a better performance of the financial services industry,” Chief Executive Officer Andreas Treichl told analysts and investors at a London meeting today. “What it does is it makes us more confident. The general mood is actually turning slightly more positive.”

Erste, trailing UniCredit SpA and Raiffeisen Bank International AG among banks operating in Europe’s ex-communist bloc, has promised investors to bolster earnings this year by returning its debt-ridden Romanian unit to profit. A shrinking economy has pushed almost a third of its loans in the Black Sea country into delinquency.

Shares Rise

Erste rose 1.1 percent to 24.38 euros at 4:34 p.m. in Vienna. The 40-member Bloomberg Europe Banks and Financial Services Index advanced 0.8 percent.

“The Romanian provisions improvement is encouraging as is the iteration of Romania returning to profitability in 2013,” Stefan Nedialkov and Simon Nellis, analysts at Citigroup Inc. in London, said in a note to clients. “But weakness in Hungary and Group Corporates may moderate the market’s excitement.”

Erste’s biggest revenue source, net interest income, or the difference between the interest the bank charges borrowers for loans and what it pays for deposits, declined to 1.24 billion euros from 1.34 billion euros a year earlier.

The loan book shrank 1.2 percent in March from the end of last year to 130.3 billion euros, driven by Hungary, Austria’s neighboring country, mired in recession where Erste owns the second-biggest bank.

Aid Redemption

Erste is ready to redeem 1.24 billion euros of state aid it received in 2009, Treichl said. It’s in talks with the central bank and the Finanzmarktaufsicht watchdog, whose approval it needs for the repayment, with the CEO saying he would be “unhappy” if he wasn’t able to resolve the talks in 2013.

“We’d like to get out of the hands of the state soon and we’re in negotiations,” Treichl said. “We don’t want to issue common equity, we don’t want to dilute shareholders,” he said, adding that a so-called contingent convertible, or “CoCo” bond that automatically converts into equity under certain conditions might be an option to replace state capital.

The shrinking net loss in Romania was bolstered by a 42 percent reduction in bad debt charges, Erste said. Still, delinquent loans as a share of total lending in the country increased to 30 percent at the end of March.

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