Erste Profit Misses Estimates as Interest Income Drops

Erste Group Bank AG, the Austrian lender that’s eastern Europe’s third-largest bank, reported second-quarter profit that missed analysts’ estimates after waning demand and lower interest rates hurt lending revenue.

Net income rose 17 percent to 125 million euros ($166 million), the Vienna-based bank said in a statement today, missing the 138 million-euro average estimate in a company survey of 18 analysts. Net interest income, its main revenue source, fell 9.4 percent to 1.19 billion euros, below all estimates in the poll.

“Net interest income declined more than expected on lower demand and weak interest rates,” said Eleni Papoula, a London-based analyst at Berenberg Bank who rates Erste stock a sell. “Eastern European banks will suffer pressure on interest income because of lower base rates.”

Erste is facing declining revenue in central and eastern Europe, where the bank trails only UniCredit SpA and Raiffeisen Bank International AG. Central banks have cut rates in countries including Hungary and Romania as the region remains mired in recession or slow growth. Chief Executive Officer Andreas Treichl has pledged to turn around the Romanian unit this year.

Erste declined 1.9 percent at 10:39 a.m. in Vienna trading, underperforming the 44-member Bloomberg Europe Banks and Financial Services Index, which was 0.2 percent lower. The stock trades at 0.67 times book value, less than the 0.83 average for the index’s members.

Profit Outlook

The bank cut its earnings outlook when it announced a 661 million-euro sale of new shares, which concluded this month. It reiterated today that it expects pre-provision operating profit to decline 5 percent this year as the slide in revenue outpaces cost cuts. Earnings on that basis were 6 percent lower at 1.6 billion euros during the first half.

Erste reported a second-quarter profit in Romania as a 128 million-euro release of a deferred tax liability helped snap a stretch of eight straight quarterly losses. Bad debt in the Black Sea nation of 20 million people ballooned to 30 percent of its loan book.

Erste reiterated that it expected the business to return to profit in the full year, even excluding the tax credit. The lender paid six times book value when it agreed to buy Banca Comerciala Romana, the nation’s biggest lender, for 3.75 billion euros in 2005 and has made several writedowns since.

Hungary Loss

In Hungary, Erste’s losses widened in the quarter amid additional tax charges. Prime Minister Viktor Orban’s government is seeking ways to cut the stock of mortgages denominated in Swiss francs, which may cause further losses at the country’s banks. Erste Bank Hungary is the nation’s second-biggest lender, trailing OTP Bank Nyrt.

Erste’s bad debt charges rose 7 percent from a year earlier and non-performing loans expanded to 9.7 percent of a shrinking loan book, mostly because of defaults on real estate and large corporate loans. Builder Alpine Holding GmbH, an Erste client, filed for Austria’s biggest postwar insolvency last month.

Erste’s share sale helped boost its core Tier 1 ratio, a measure of banks’ financial strength, to 10.7 percent from 9.6 percent three months earlier. That ratio already excludes 1.76 billion euros of non-voting capital from the Austrian state and some private investors, which the bank will repay next month.

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