UPDATE 3-Erste sees better 2012 as bad debt costs fall

Wed Feb 29, 2012 8:24am EST

Related Topics

* Q4 net profit 254.1 mln euros vs 181 mln poll average

* EBA core tier 1 ratio 8.9 pct at end-2011, 166 mln shortfall to cover

* Shares up 4.8 pct (Adds comments from conference call, news conference)

By Michael Shields

VIENNA, Feb 29 (Reuters) - Erste Group Bank, emerging Europe's second-biggest lender, forecast improved operating results for this year as provisions for bad debts fall from elevated 2011 levels and its Hungarian headache eases.

The upbeat outlook and news the Austrian bank had already nearly reached the core capital level big European lenders must reach by mid-2012 supported its shares, which rose nearly 5 percent, the biggest gainers among bank sector peers.

The economies in most core markets would grow this year, albeit at slower paces than in 2011, with only Hungary and Croatia set for "a mild negative performance," the Vienna-based bank said on Wednesday.

Its overall loan book would likely only expand at a low-single-digit rate this year, but it will escape the big bad debt provisions that marred 2011, especially in Hungary.

Provisions jumped 12 percent in 2011 to 2.27 billion euros ($3 billion), primarily to cover losses from Hungary's scheme to let borrowers repay foreign-currency loans at below-market rates and to raise coverage for dud loans in Hungary and Romania.

"We think we will be able to improve - not dramatically - the 2012 operating result and hope our risk costs will be far below those of 2011," Chief Executive Andreas Treichl said, noting emerging Europe was poised to outgrow western Europe.

Customers in Hungary had repaid 730 million euros worth of Swiss franc loans by this week, causing a loss of around 200 million euros that was covered by previous risk provisions.

It saw a potential impact of around 80 million euros spread over five years from additional relief for Hungarian borrowers under a proposal subject to parliamentary approval in Budapest.

Erste lost 567 million euros in Hungary last year and expects to return to profit there only in 2014.

Treichl said Erste was on track to exceed the European Banking Authority's (EBA) goal for key lenders to reach a core tier 1 ratio of 9 percent of risk-weighted assets by mid-2012.

Its EBA core tier 1 ratio already stood at 8.9 percent at the end of 2011, leaving it well placed to use retained earnings and reductions of non-core assets to fill the remaining capital gap of 166 million euros, down from 743 million late last year.

PERIPHERAL EXPOSURE WANES

Fourth-quarter net profit edged up year on year to 254.1 million, easily beating the average estimate of 181 million in a Reuters poll of analysts. That brought its annual loss to 718.9 million.

The bank said in October it would lose up to 800 million euros in 2011 and omit a dividend after taking hits on foreign-currency loans in Hungary, euro zone sovereign debt and its credit default swap portfolio.

Treichl told reporters he expected no headwinds from Austrian regulatory proposals now being discussed with the European Commission that limit banks' new lending in emerging Europe to 110 percent of local financing banks can arrange.

"I don't think there will be a problem in the countries in which we operate," he said, adding Hungary's woes had nothing to do with Austrian banking watchdog initiatives.

Treichl would not discuss a potential 2012 dividend until he knew more about what capital regulators would require it to hold in the medium term. He said Erste was also in no rush to repay state capital it received during the financial crisis. {ID:nWEA3780]

Erste's net sovereign debt exposure to Greece, Ireland, Portugal, Spain and Italy stood at a combined 553 million euros at the end of 2011, down from 2.12 billion a year earlier. It fell below 150 million in January due manly to a 400 million euro Italian bond redemption, Erste officials said.

Erste shares rose 4.8 percent to 18.92 euros by 1248 GMT.

Erste had been trading at 8.2 times 12-month forward earnings, a premium to rival Raiffeisen Bank International (RBI) on 7.2 times, according to Thomson Reuters StarMine, which weights estimates by analysts' previous accuracy.

Pretax profit at RBI rose nearly 7 percent last year while net profit after minorities fell 11 percent to 968 million euros as deferred taxes hit the bottom line, emerging Europe's third-biggest lender said last week.

($1 = 0.7450 euros) (Additional reporting by Angelika Gruber; Editing by Erica Billingham and David Cowell)

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