Erste Says Bad Debt Persists Amid ECB Review; Shares Drop

Erste Group Bank AG, Austria’s biggest bank, said operating profit will miss estimates this year as it sets aside more charges than expected for bad loans amid a European Central Bank asset review. The shares slumped.

Erste expects pre-provision operating profit to remain little changed in 2014 at around 3.1 billion euros ($4.2 billion), the Vienna-based company said in a statement today. That compared with an average estimate of 3.4 billion euros, according to the company’s survey of 26 analysts published on its website.

“The disappointing 2014 outlook changes everything,” said Thomas Stoegner, a London-based analyst at Macquarie Bank Ltd, who cut his investment recommendation to neutral today. “Our previous investment case of good earnings momentum will likely be delayed into 2015.”

Erste is among about 128 banks subject to a review of the quality of their assets by the ECB this year as Europe’s leaders seek to rule out any repeat of a swathe of taxpayer-funded bailouts that followed the 2008 financial crisis. It’s the third-biggest lender in central and eastern Europe after UniCredit SpA and Raiffeisen Bank International AG.

The bank’s shares fell as much as 13 percent in Vienna trading, the most since it slashed its profit forecast in October 2011. They fell 10 percent to 25.71 euros at the close of trading, valuing the company at 11.04 billion euros and making it the worst performer in the 43-company Bloomberg Europe Banks and Financial Services Index, which was little changed.

Bad Loans

Bad debt provisions will be about 1.7 billion euros this year and won’t decline by more than 5 percent, compared with provisions of 1.763 billion euros in 2013, when they consumed more than a third of Erste’s net interest income. The average analyst estimate was for 1.4 billion euros, a 20 percent decline in provisions.

“We remain cautious with regards to the risk costs given that at this point in time we’re just starting to get involved in the Asset Quality Review,” Chief Executive Officer Andreas Treichl told analysts in a conference call. “By mid-year we will get a better feeling on what this means for us.”

Treichl is struggling with declining revenue in a region mired in slow growth or recession where customers are reluctant to borrow and interest rates are low. Erste, which owns the largest banks in the Czech Republic and Romania and the second-biggest lender in Hungary, said net customer loans won’t grow or shrink more than 2 percent, remaining at about 120 billion euros this year.

Dividend Cut

The bank proposed to pay a dividend to shareholders of 20 cents per share from 2013 profit compared with 40 cents a year earlier. The Bloomberg dividend forecast was 25 cents. Erste’s net income fell to 61 million euros compared with 483.5 million euros a year earlier, it said on Feb. 11.

Profit last year was hurt by previously announced goodwill writedowns of 383 million euros on Erste’s Romanian and Croatian units, and by a final writedown caused by the sale of its Ukrainian lender. The bank also can’t realize as much in tax losses as before because banking levies in Austria, Hungary and Slovakia reduced its taxable income, it said.

Austria introduced a banking levy in 2011 to force lenders to contribute to bank bailouts. The charge is due to rise to about 640 million euros this year. Treichl said he doesn’t expect the government to raise the tax further.

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