Erste bounces back with €968mn net profit for 2015

Erste bounces back with €968mn net profit for 2015
Erste is benefiting from a big improvement in its Romanian operations.
By Robert Anderson in Vienna February 26, 2016

Erste Bank, the third biggest bank in Central Europe by assets, bounced back in 2015 with a higher than expected net profit of €968.2mn.

It recommended a dividend payout of €0.5 per share after skipping a payout in 2014. That year it made a loss of €1.38bn because of heavy risk costs of its Romanian operations. Erste’s shares rose 3% to €25.34 in early trading in Vienna, valuing the bank at €10.87bn, according to Bloomberg.

In the fourth quarter net profit rose to €204mn, compared with an average forecast of €172mn in a Reuters poll of analysts.

CEO Andreas Treichl told a press conference in Vienna Erste’s 9.3% return on equity (ROE) makes it one of the few European banks that is exceeding its cost of capital. Treichl predicted that ROE would be between 10% and 11% this year, and that dividends may very well be increased in the future.

However, Erste said it would not take advantage of its return to profitability to fulfil its long-held dream to add Poland to its Central European portfolio, despite plunging bank valuations there. “We are pretty occupied in countries where we have room for growth,” Treichl said. A year ago the CEO said Erste would take a two-year break from acquisitions. 

The big improvement in 2015 was driven by a 65% decline in risk costs, particularly in Romania, where the bank actually wrote back €16mn after incurring risk costs of €924mn in 2014. The unit's non-performing loans (NPLs) fell to 7.1% of total loans from 8.5% in 2014. Treichl told an analyst call that he expects risk costs to remain stable this year.

The return to profitability and the decline in risk-weighted assets pushed its fully loaded CET1 ratio, a measure of core capital, to 12% from 10.6% a year ago.

Erste increased net loans by 4.2% last year as domestic demand in Central Europe grew strongly. In the Czech Republic, by far its most profitable foreign operation, the loan book grew from €18bn to €19.7bn.

However, net interest income fell 1% because of the prevailing low interest rate environment and Treichl said he did not expect this to change in 2016. Eurozone members Austria and Slovakia, together with the Czech Republic, have held interest rates at 0.05%, which means Erste earns almost nothing on the funds it is forced to hold in government bonds under regulators’ liquidity rules.

Erste’s operating costs rose 2.2% in 2015 because of the burden of tighter regulatory requirements, as well as the bank’s big digital investment programme. The bank’s cost-income ratio rose 2 percentage points to 57.1%.

Treichl said costs would continue to be heavy as Erste invested in its online and back office operations but the programme would add to profitability from 2019.

All of Erste’s country units were profitable at an operating level in 2015, though it booked one-off impairments totalling €121mn in Hungary and Romania.

In Hungary, all banks have been rocked by the Fidesz government’s banking levy and its measures to benefit borrowers, particularly through forced conversions of foreign currency loans at advantageous rates.

The government schemes have helped reduce non-performing loans (Erste’s NPLs fell from 26.8% to 18.7% in 2015) but at the cost of declining overall lending in the economy (Erste’s loanbook fell from €3.6bn to €3.1bn last year, giving it a loan to deposit ratio of 111%). Gernot Mittendorfer, board member for asset liability management, told the press conference that Erste’s lending in Hungary would stabilise in 2016. “We expect a stable or positive trend,” he said.

Erste sealed a deal with the Hungarian government a year ago, in which the state would take a 15% stake in the bank’s unit in Hungary, so long as the banking environment was improved. Treichl said the deal would finally be completed in the next few months – almost a year later than planned. “There are just a few details that have to be sorted out,” he said. “Everything is under control.”

It is understood that the price for the stake has been agreed but completion is awaiting the government fulfilling its promise to reduce the banking tax further for 2017.

In Romania, Mittendorfer hailed a “significant improvement” in performance and forecast “solid development” this year. NPLs should fall from 20.2% at the end of 2015 to around 15% after the sale of a €500mn package of bad loans is booked in the first quarter.

However, Erste and other banks are furious about the passing of a law that allows borrowers to walk away from their debts. Erste has made provisions of €101.6mn for the expected spike in NPLs the law will cause.

“If that law is passed in its present form I think it will change mortgage lending dramatically,” Treichl said, warning that it would destroy the mortgage market.  “It’s very difficult for me to understand how the Romanian parliament could pass legislation like that.”