Erste Sells Shares to Repay State Aid as Earnings Fall

Erste Group Bank AG, Austria’s biggest lender, will sell about 660 million euros ($865 million) of new stock in the third quarter to help repay state aid. The shares dropped as much as 9.6 percent in Vienna.

Erste, the third-largest bank in eastern Europe, plans to pay back 1.2 billion euros in Austrian government aid raised in 2009, as well as 559 million euros in capital linked to the assistance, it said in a statement from Vienna today. The capital increase amounts to about 8 percent of Erste’s market value.

“It was always clear that they’d repay the aid, but that they need a capital increase for that is not so great,” said Dirk Becker, a Frankfurt-based analyst at Kepler Cheuvreux who rates Erste shares hold. “It’s also slightly contradicting what they’ve always told us.”

Chief Executive Officer Andreas Treichl has pledged to bolster earnings this year, mostly by turning around the debt-ridden Romanian unit. Erste, trailing only UniCredit SpA and Austria’s Raiffeisen Bank International AG in eastern Europe, is struggling to balance declining lending revenue with cost cuts and lower bad debt charges as central and eastern European economies remain mired in slow growth.

Erste was the second-worst performer after Kazakhmys Plc in the Bloomberg European 500 index of the continent’s biggest companies. It fell as much as 9.6 percent, the most in 19 months, and was 7.6 percent lower at 20.28 euros by 3:43 p.m. in Vienna, erasing more than half a billion euros from its market value.

Earnings Drop

The repayment will save Erste 149 million euros in dividend payments next year, after tax. Its core equity Tier 1 ratio, a gauge of financial strength, will reach 10 percent under new rules set by the Basel Committee for Banking Supervision by the end of next year, Erste said. The rights offer will be managed by JPMorgan Chase & Co., Morgan Stanley and Erste.

Erste cut its earnings outlook, saying it now expects pre-provision operating profit to decline 5 percent this year. It had forecast “stable” profit, compared with last year’s 3.47 billion euros, at its annual general meeting in May. Revenue will decline more than previously estimated, a drop that will be “only partially offset by lower operating costs,” the bank said.

“The economic situation in eastern Europe is simply not turning upwards and as long as it isn’t, there’s also no loan growth,” Kepler’s Becker said.

Estimate Changes

Erste owns the biggest banks in Romania and Slovakia, the second biggest in Hungary and the Czech Republic and the No. 3 in Croatia. In Romania, 30 percent of its loan book is non-performing, while in Hungary, 26 percent of lending is overdue. Loan losses in those two countries are the biggest brake on Erste’s profit recovery plans.

Provisions for bad debt will fall by as much as 15 percent this year from 1.98 billion euros in 2012, Erste said in the statement, narrowing the forecast range from a “double-digit” percentage previously.

The share sale and profit decline mean this year’s earnings per share will be 8 percent lower than estimated, said Matteo Ramenghi, an analyst at UBS AG who recommends buying the stock. Earnings on that basis will rise 9 percent next year because the bank will no longer have to pay dividends on the state aid, Ramenghi said in a note to clients.

Aid Terms

In 2009, Erste received the 1.76 billion euros in non-voting capital it is now repaying. At the time, it sold 1.22 billion euros to the government and 540 million euros to private investors. Private investors this year took over 19 million euros from the state portion. Dividend payments for the capital will rise to 8.5 percent next year from 8 percent currently and are set to increase further thereafter.

Austrian Finance Minister Maria Fekter said the repayment is “more than good news” for Austrian taxpayers. The measure frees up funds Fekter may need this year to underpin a “bad bank” for nationalized Hypo Alpe-Adria-Bank International AG.

Erste joins Bawag PSK Bank AG, the lender owned by Cerberus Capital Management and GoldenTree Asset Management, which will repay 50 million euros this month of the 550 million euros in state capital it received in 2009.

Raiffeisen received 1.75 billion euros of government assistance, complemented by 750 million euros from private investors, the same year. The lender has so far declined to say when it plans to repay the funds and has said it won’t sell new shares at the current level.

“Erste Group’s announcement will naturally drive some focus on the position at Raiffeisen,” said Deutsche Bank AG analyst Jason Napier in a note to clients. “The pressure to act will, however, clearly have risen following Erste Group’s planned capital increase.”

Raiffeisen dropped 3.2 percent to 23.12 euros by 3:49 p.m. in Vienna, bringing its decline this year to 27 percent.

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