Erste Rises as Bad Loans Decline Ahead of ECB Asset Test

Erste Group Bank AG, eastern Europe’s third-biggest bank, said bad loans declined for the first time since 2008 as it prepared for a Europe-wide assessment of banks’ asset quality.

Non-performing loans fell to 9.6 percent of the loanbook at the end of September from 9.7 percent three months earlier, the Vienna-based company said in a statement on its website today. Provisions for bad debt declined 11 percent from a year earlier, which helped limit a decline in quarterly net income. Erste’s shares advanced to a two-month high.

“We feel strong at the start of the asset quality review,” Chief Executive Officer Andreas Treichl told analysts during a conference call. “Asset quality is improving. We feel very comfortable with the review, and see a continuation of the decline in risk costs over the next quarters.”

The European Central Bank will go through the accounts of about 124 euro-area banks in a three-step process starting next month. Examiners will identify potentially problematic loans, review those assets in early 2014, and conduct stress tests before the ECB officially takes over as banking regulator a year from now. Lenders including Intesa Sanpaolo SpA and Banco Bilbao Vizcaya Argentaria SA have increased provisions in preparation.

Erste rose as much as 4 percent to 26.01 euros in Vienna, the highest intraday level since Aug. 19. The shares climbed 3.4 percent at 12:21 p.m., valuing the company at 11.1 billion euros. The 44-member Bloomberg Europe Banks and Financial Services Index advanced 0.6 percent.

The ECB’s focus would most likely be on “the usual suspects,” or problem loans that Erste has already identified in the last quarters, Chief Financial Officer Gernot Mittendorfer said on the call with Treichl. “We have done a lot over the last couple of quarters, and I feel confident that those activities will be reflected in the results of the AQR.”

Profit Declines

Erste’s third-quarter net income dropped 10 percent to 129.1 million euros ($177 million) as a slide in revenue from lending outpaced cost-cuts and the reduction in loan-loss provisions. The average estimate in a company survey of 22 analysts was for a profit of 133 million euros.

“One encouraging point of the results is that the non-performing loan ratio declined while the coverage increased,” Eleni Papoula, a London-based analyst at Berenberg Bank who recommends that investors sell Erste shares, said in a telephone interview. “Overall the results are in-line and they are maintaining their cautious outlook.”

Slow Growth

Erste’s revenue is declining as central and eastern European economies remain mired in recession or slow growth. The bank, which trails only UniCredit SpA and Raiffeisen Bank International AG for total assets among banks in the region, kept its earnings forecast, estimating that pre-provision operating profit will fall by 5 percent this year.

Treichl said he didn’t expect credit growth of more than 5 percent annually in the coming quarters because the economic recovery in eastern Europe isn’t strong enough.

“We don’t think risk-weighted assets or lending volumes will continue to decline but at the same time we don’t expect any material growth,” he said.

Treichl has pledged to expand earnings by turning around Erste’s Romanian unit this year, a plan which he said will be delivered. Losses will continue in Hungary, where it owns the second-biggest bank after OTP Bank Nyrt. Prime Minister Viktor Orban’s government is seeking ways to cut the stock of mortgages denominated in Swiss francs.

Erste may buy Croatia’s Hrvatska Postanska Banka dd from the government in a “small” transaction, Treichl said. The ECB review will probably trigger more deals toward the end of next year, he said.

“If the AQR will be a really serious exercise, there will be substantial action towards the end of 2014,” he said about potential acquisitions. “If there is some action at a later time, we want to be prepared for that.”

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