VIENNA Erste Group Bank AG (ERST.VI), emerging Europe's second-biggest lender, said it would lose up to 800 million euros ($1 billion) this year and not pay a dividend after taking hits on foreign-currency loans in Hungary and euro zone sovereign debt.
It unveiled big goodwill writedowns in key markets Hungary and Romania and took another blow from changing the way it values off-balance-sheet credit default swaps.
The Austrian bank's shares, which had slumped last month to a 2-1/2 year low of 15.52 euros, were down 12 percent to 18.21 euros by 1455 GMT on Monday, off a low of 17 euros but badly lagging a 1.9 percent higher European banking sector .SX7P.
"This is clearly disappointing news. In our view, today's announcement is likely to trigger a cycle of ratings downgrades and to renew concerns over capital in the light of a worsening operating environment in eastern Europe," brokerage GFI Research said in a research note.
Erste Chief Executive Andreas Treichl said solid operating profit would help keep Erste's core Tier One capital ratio, a key measure of a banks' financial strength, at 9.2 percent of risk-weighted assets at year's end, unchanged from the end of 2010.
He said Erste would not need to raise fresh equity and had not been approached by regulators about joining a European push to recapitalize banks.
The kitchen-sink approach to charges, along with volatility on financial markets, meant Erste will delay for at least a year the repayment of 1.2 billion euros in capital it got from Austria during the 2008 banking crisis. It will also skip a 2011 dividend.
The market had expected 2011 net profit of 967 million euros and a dividend of 70 cents per share, according to Thomson Reuters data.
Erste scaled back and revalued at market prices 95 percent of the state debt of struggling euro zone countries it holds.
Its sovereign exposure to Greece, Portugal, Spain, Ireland and Italy fell to 648 million euros at the end of September, with a combined exposure to Greece and Portugal of 10 million.
It faces a 500 million euro loss at its Hungarian unit -- which will now get up to about 600 million euros of new equity -- following Hungary's move to let domestic borrowers repay foreign-currency loans at below market rates.
It will write down all 312 million euros in Hungary-related goodwill and boost risk provisions there by 450 million. Treichl said Erste had given up hope of recouping losses from Hungary on the disputed loans but would not exit the country.
Austrian peer Raiffeisen Bank International (RBIV.VI) also plans to inject capital into its Hungarian unit as a result of the controversial law, its CFO said last week.
Raiffeisen, whose shares were down 5.4 percent, said on Monday it still expected a 2011 profit given scant goodwill in Hungary and low exposure to troubled euro zone sovereign debt.
But RBI needs to add around 100 million euros to provisions due to the new Hungarian loan law and faces "an additional significant provisioning need because of the difficult market environment in Hungary," it said.
Erste said slower-than-expected economic recovery in Romania meant it would write down 700 million euros of goodwill there this year. It will also inject 100 million euros of equity to the Romanian unit, Treichl said.
Treichl said his position as CEO was secure despite the problems in Hungary and Romania, two key planks of his central Europe expansion strategy that he said remained intact.
He said Erste had no choice but to take drastic action on its balance sheet given the environment in those two countries and the euro zone debt crisis.
"We have scant hope that there could be clear and decisive decisions soon on the future of Europe," he said.
($1 = 0.741 euro)