Erste Falls as Profit Beat Fails to Assuage Growth Concerns

  • Profit boosted by unsustainable drop in bad-debt charges
  • Loans fail to grow fast enough to boost interest income

Erste Group Bank AG’s shares tumbled on Wednesday after the biggest lender in Austria, the Czech Republic and Romania said its first-quarter provisions for bad loans were too low to be considered a guide to the future.

“There was no corporate default of significance in the first quarter, which is a very rare situation,” Chief Risk Officer Andreas Gottschling said in a call with analysts. “There is nothing to justify the level of risk costs booked in the first quarter, so I would refrain from turning this into any kind of run-rate.”

Loan-loss provisions plunged in the three months through March, boosting net income to 274.7 million euros ($316 million) from 226 million euros a year earlier, the Vienna-based bank said earlier Wednesday. That beat the average analyst estimate of 219 million euros even though revenue fell more than expected.

The shares fell as much as 4 percent to the lowest in six weeks, making them the worst performer in the Euro Stoxx Banks index, which was little changed.

Quality Assets

Chief Executive Officer Andreas Treichl, one of the longest-serving CEOs at a major European lender with a tenure dating to 1997, needs a return to loan growth in eastern Europe to restore revenue dented by record-low interest rates and the bank’s exit from riskier businesses. His bank also needs to maintain asset quality after years of loan losses racked up by its Hungarian and Romanian units.

“We are particularly encouraged by the fact that asset quality improved again to levels last seen at the end of 2009,” he said. “Customer loans continued to grow; however, they could only partially offset the decline in net interest income, which was impacted by the negative rates.”

Revenue declined 3 percent to 1.63 billion euros across Austria and the central and eastern European region, where Erste is the third-biggest bank after UniCredit SpA and Raiffeisen Bank International AG. On top of a decline of interest income, particularly in Romania and Hungary where Erste sold bad loans, fee income fell more than expected.

Reorienting Customers

Treichl said the key driver for fee growth will be to move retail clients, especially in Austria and the Czech republic, from deposits to asset-management products, which earn better yields for the clients and fees for the bank.

“We haven’t found the ideal structure yet with which we can attract retail clients,” Treichl said. “If we don’t manage to switch volumes on that front, our hope that fee income can stabilize this year is very limited.”

Erste’s loan book grew 2.7 percent from a year earlier, the bank said. Treichl told analysts in February that he needs 5 percent loan growth to stop net interest income from shrinking this year.

The bank’s fully-loaded core equity Tier 1 ratio, a measure of financial strength, was unchanged from the end of 2015 at 12 percent. The group reaffirmed its goal of reaching a return on tangible equity of 10 percent to 11 percent this year.

The shares were down 5.2 percent at 23.55 euros as markets closed in Vienna, taking the decline this year to 18.5 percent.

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