Erste lifts net profit 22% y/y to €275mn in first quarter

Erste lifts net profit 22% y/y to €275mn in first quarter
Erste hinted it could substantially increase dividends in coming years as its performance continued to improve.
By Robert Anderson in Prague May 4, 2016

Erste Group, the third biggest bank in Central Europe by assets, reported a 22% y/y rise in net profit in the first quarter to a total of €275mn, and hinted it could substantially increase dividends in coming years as its performance continues to improve.

Andreas Treichl, the bank’s chief executive since 1997, told an analyst meeting in London that Erste would wait for the outcome of the European Central Bank’s Supervisory Review and Evaluation Process (SREP) later this year – which will set the capital buffers big banks must hold – but that dividend payouts “could be a lot higher”.

He also reiterated that dividends would be preferred to acquisitions, saying that he was “not in favour of any major M&A [mergers and acquisition] activity in the coming years,” adding “anything that makes our group more complicated stands in the way of [higher dividends]”.

Erste paid a dividend of €0.5 per share on its 2015 profits. It had skipped a payout for 2014, when it made a loss of €1.383bn after heavy risk costs in its Romanian operations.

The Q1 profits were better than the bank expected, Treichl said, and were also above the average forecast of €219mn in a Reuters poll. The results were boosted by a 69% year-on-year fall in net impairments, which Treichl said were “substantially lower” than expected, as well as lower taxes and payments to minorities.

Payments to banking levies and resolution funds were front-loaded to this quarter, which should boost profitability in upcoming quarters, but Treichl said he expected that risk costs would also be higher in the rest of the year. Non-performing loans fell 0.4pp on a quarterly basis to 6.7% of total loans. Andreas Gottschling, chief risk officer, said the bank was “homing in on a ratio with 5 at the front”.

Unhappy on the SME side

However, net interest income and net fees and commissions edged lower in the continuing low interest rate environment, demonstrating the problems Erste has to use its huge deposit base for profitable lending. Erste’s net interest margin (NIM) fell 4 basis points year-on-year to 2.5%. In Romania, the NIM fell 29 basis points to 3.8% after the loan portfolio was repriced.

Treichl pointed out that discussions over moving towards negative interest rates – notably in the Czech Republic – would pose a “big question” for banks, who would have to consider charging depositors negative rates too.

He also noted the bank needed to boost its small and medium-sized enterprise (SME) lending to help boost profits. “We are rather unhappy on the SME side,” he said. “Improving the profitability of our SME lending is one of our key targets.”

Erste said its results in Hungary – with Romania, its most problematic operation – were helped by a fall in the banking levy at the start of the year, cutting its bill by €25mn. However, loan volumes had not increased because new loans were balanced by repayments. As part of a peace deal with the Fidesz government, Erste has agreed to try to boost loan growth there.

“Overall, we consider the results neutral,” J&T Banka in Prague said in a note. “The bottom line significantly beat expectations but the operating level is weaker than expected.” Erste’s shares fell 3% to €24.06 by mid afternoon.

Erste’s fully loaded CET1 ratio, a measure of core capital, increased from 12% to 12.3% including Q1 profits. Its return on tangible equity (ROTE) reached 11.3% compared to 8.7% in the fourth quarter. Erste maintained its ROTE target of between 10% and 11% this year.