Erste hopes losses are "final step" in crisis legacy for CEE banks

By bne IntelliNews July 31, 2014

Nicholas Watson in Vienna -


The hits on Emerging Europe's banks keep coming thick and fast as legacy problems from the 2008 crisis continue to dog the sector. The latest example is Erste Group's €930m loss in the first half of the year, mainly due to problems at its Romanian and Hungarian subsidiaries. 

Erste, the third largest lender in the Emerging European region, said on July 31 that it made a net loss of €929.7m in the first six months of the year, swinging from a net profit of €302.2m for the same period in 2013. The second quarter did the most damage, the bank ending the three months to June €1.03bn in the red.

For investors, this came as little surprise; Erste had prepared the ground by warning on July 3 that it expects to make a net loss of between €1.4bn-€1.6bn for the full year due to problems in Romania and Hungary. That announcement saw Erste shares dive, sending them to a drop of 35% since January 15. CEO Andreas Treichl described that fall on CNBC on July 7 as "harsh" but "understandably so". 

With such bad news priced in, that meant the first half figures actually saw Erste shares rise. Following the release, the stock gained 1.85% to €19.84 in morning trading on July 31.

Final step

The bulk of the losses came from Erste's decision to write down goodwill to effectively zero in places like Romania and set aside €130m to cover costs from the Hungarian government's new plan to force banks to compensate customers for mispricing foreign-currency loans. The bank says it hopes that the actions are a final step in dealing with the hangover from the boom that went so spectacularly bust in 2008. 

"What we announced on July 3 was clearly our wish to put the crisis behind us, and it's fair to say that we did everything within our power and knowledge to make sure that as of 2015 we will not have to deal with such legacy issues," Treichl tells bne.

However, he adds that he's become "careful when making predictions, given what has happened over the last few years". Indeed, the details of the Hungarian government's final plan to deal with the forex loans issue won't be known until the autumn, so a "small, medium or large scale surprise" is on the cards, the Erste CEO admits. 

Like many in the region, Hungarians took out a huge amount of mortgages and other loans in Swiss francs and euros during the boom years, when the local currency was soaring in value. However, since the crisis the forint has sunk, multiplying repayments. 

Prime Minister Viktor Orban's government has roughed up the banks since coming to power in 2010 with new taxes, and has been pushing a scheme to finally clean up the forex loans issue for the past year. On July 21, Economy Minister Mihaly Varga, said the government will submit a bill in November or early in December that will see banks required to convert such forex loans. However, the rates at which those conversions take place, the share out of the likely losses between the banks, government and borrowers, and the pace of the scheme, are as yet unknown.

"Whatever it is we must take this in our stride," Treichl said, adding that the bank has no intention of leaving the Hungarian market, having been present there since the 19th century. "I think we belong in Hungary and we will stay there - I think it will be successful."

Nasty surprises

Many of Erste's write-downs can be linked to the pre-crisis credit bubble especially in the real estate sector; the bank reported 4% higher provisioning costs in the second quarter on commercial real estate loans. 

However, the bank is also keen to stress that the non-performing loans across segments and countries in the region are declining, suggesting that the bad debt is finally working itself out the system.

"International banks are still mopping up the spill-over from the global financial crisis, which hit hard in the CEE countries that experienced credit-driven economic booms in the early 2000s," says Otilia Dhand, vice president at Teneo Intelligence. "This year, several central banks and governments in Europe moved to finally deal with the legacy of the crisis - the stockpile of non-performing loans that have challenged banking sector stability and bogged down the economic recovery."

Coming on the back of a banking crisis in Bulgaria, and the worsening state of the sector in Ukraine - where the banks are teetering on the edge of a full-blown crisis - many believe there will be more bad news for the region's banking sector in the months ahead.

"I can't exclude any nasty surprises in the region due to political decisions or developments," says Treichl. "I'm not in a situation right now to tell you the effects of a deepening of the crisis in Ukraine and Russia. If that crisis accelerates, of course, we will have to revise our forecast for all over Europe in 2015 and 2016."


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