Erste Group, the third biggest bank in Central and Eastern Europe, reported 2017 profits up 4.1% to a record €1.31bn on February 28, helped by rising interest rates, fees and lending, and falling risk costs and bank taxes.
Erste shares rose almost 7% on the day, closing at €41.91, giving the Austrian bank a market capitalisation of around €18bn.
Erste posted solid growth in its business, increasing assets by 6.0% in 2017 to €220.7bn, with loans to customers up 6.8% to €139.5bn. But deposits soared even more by 9.4% to €150.9bn, giving the group an all-time low loan-deposit ratio of 92.4% compared to 94.7% at the end of 2016.
Andreas Triechl, chief executive, hailed this growth of deposits and loans: “The proof is also in the exceptional net inflow of €13bn in client deposits and the strong demand from entrepreneurs and private households, to whom we granted over €9bn in new loans to pursue their aspirations.”
For the first time in several years he predicted a slight increase in net interest income in 2018, helped by rising interest rates and mid single digit loan growth, which, together with moderately increasing fee and commission income and falling costs, will deliver increased profits.
“We're very confident that we can finally see real top line growth, not much, but some, and we're also very confident that we will bring expenses down in 2018 from 2017 level,” he told a conference call with analysts.
Erste is targeting a return on tangible equity (ROTE) of more than 10% in 2018, after 11.5% in 2017.
In 2017 net interest income declined 0.5% to €4.35bn because of lower interest income from its government bond portfolio. Net fee and commission income increased 3.8% to €1.85bn, while net trading income plunged 21.5% to €222.8mn. Banking and transaction taxes declined to €105.7mn from €388.8mn.
Net impairment loss on financial assets declined to €132.0mn, or a record low 9 basis points of average gross customer loans, compared to €195.7mn or 15 basis points in 2016. The non-performing loan ratio improved further to 4.0% from 4.9%, a level that Treichl said had not been seen since before the global financial crisis.
Erste predicts risk costs should actually increase in 2018, because of rising interest rates, to up to 20 basis points of average gross customer loans.
General administrative expenses rose 3.2% to €4.16bn in 2017, creating a worsening cost/income ratio of 62.4% (60.2%).
The bank said operating expenses are expected to decline marginally in 2018, after the end of expenditure to meet new regulatory requirements, together with ongoing cuts in the back office, which should start to deliver the first fruits in the bottom line. “We are about to pretty dramatically reduce our bad costs,” Treichl told Bloomberg TV.
The bank, however, will continue to invest heavily in the digitalisation of its front office, with its George online banking platform, though not by as much as last year. After its rollout in Austria, George will be fully up and running in the Czech Republic, Slovakia and Romania in 2018. Already 2mn of its 16mn customers use the service, and in the four countries around 20% of consumer loans were arranged digitally in 2017 and more than 30% of new deposits were opened on the platform.
Treichl said rollouts of George in Romania, Hungary and Croatia were a priority, and the bank was considering expanding it in 2019-20 to countries where it does not have bricks and mortar branches.
“If we have the capacity and if we see a good chance and we have the resources, both financial and human resources, to move into another market and we see that George could be attractive enough that we can attract a strong client base without having a physical presence in one of the neighbouring countries, we're going to do it,” he said during the analyst call.
“It has increased traffic, increased our client base and it has dramatically improved the awareness, the image and the attractiveness of the Erste banks in every region, every country where George has already been implemented,” he added.
Erste’s profitability, together with its solid capital strength – its fully loaded common equity tier 1 (CET 1) ratio rose from 12.4% at the end of September to 12.9% – as well as what Treichl said was greater regulatory clarity, have enabled it to increase dividends. The group plans a 20% increase in the dividend to €1.2 per share for 2017 and Treich told Bloomberg TV “the trajectory on [the 2018 dividend] is definitely positive”.