Erste Bank says Hungarian ordeal may be over

VIENNA Tue Jul 30, 2013 8:58am EDT

The logo of Austrian Erste Group Bank is pictured on the wall of a branch office behind a traffic sign in Vienna June 6, 2012. REUTERS/Heinz-Peter Bader

The logo of Austrian Erste Group Bank is pictured on the wall of a branch office behind a traffic sign in Vienna June 6, 2012.

Credit: Reuters/Heinz-Peter Bader

VIENNA (Reuters) - Austria's Erste Group Bank (ERST.VI) said it hoped the worst was behind it in Hungary, where the government was taking a more conciliatory tone towards foreign banks to help its economy.

Banks in Hungary have taken a collective hit of 3.6 billion euros ($4.8 billion) since Viktor Orban's government began an unpredictable programme of bank taxes and forced loan subsidies in 2010.

Foreign banks may suffer again from a plan to help borrowers with foreign-currency mortgages. But Erste Chief Executive Andreas Treichl said he believed the government now understood it needed foreign lenders like Erste to help drive growth.

Orban's government promised last week to hold talks with banks before pressing ahead with the new measures. Orban said on Friday the government was proposing a solution "that does not wreck the financial system".

"I'm quite hopeful that the ordeal is over," Treichl told analysts on a conference call after the bank reported second-quarter results on Tuesday that included 61 million euros ($81 million) in costs of taxes and loan subsidies in Hungary.

"I think there's a growing awareness in Hungary that enough is enough," he told a news conference later. "We hope that the latest statements we heard from the Hungarian government will lead to a closer cooperation."

Hungary wants to phase out foreign-currency mortgages, many of them provided by foreign banks, to help hundreds of thousands of borrowers who took out cheap loans in Swiss francs, euros and yen but lost out when the exchange rate shifted.

The banks, which include UniCredit's (CRDI.MI) Bank Austria, Raiffeisen (RBIV.VI) and BayernLB's BAYLB.UL MKB, fear they will bear the brunt, as in a past scheme that allowed borrowers to pay off loans at previous, cheaper exchange rates.

Hungary is one of Erste's core central European markets which it hopes will begin to improve in the second half of this year, helping it limit a fall in its overall full-year operating result to below 5 percent.

Treichl cited Hungary's falling inflation, stabilising unemployment, current-account surplus and slight economic growth as factors that gave him grounds for optimism - although he said Erste would not make a profit there again as early as next year.

The bank earlier reported a first-half loss in Hungary of 99 million euros, and Treichl said Erste had now made a cumulative loss in the country since the start of its engagement there.

KITCHEN-SINKING

Like its main rivals in the once fast-growing region, Bank Austria and Raiffeisen, Erste has been grappling with stagnation in central and eastern Europe as the effects of the euro crisis spread to neighbouring, in some cases less developed, economies.

Treichl said the region was still doing well compared to southern Europe, and he expected a slight improvement in the second half of the year, which would help the bank achieve an expected 10-15 percent cut to its risk provisions this year.

In the meantime, Erste has been strengthening its balance sheet in anticipation of new regulations on capital ratios, and said its core tier 1 capital ratio in terms of the coming Basel III requirements was already a more than adequate 10.3 percent.

"All we need is growth," said Treichl. When asked what the company's priorities for the use of capital were, he listed investing for growth, a comfortable capital position and a more generous dividend.

Erste's second-quarter pretax profit dropped to 68 million euros from 241 million euros a year earlier, when it had benefited from large one-off effects - missing a Reuters average poll estimate of 80 million euros.

The bank's net interest income fell 9 percent to 1.19 billion euros as interest rates and demand both fell.

Erste cut its general administrative costs in the quarter by 3 percent to 912 million euros and said full-year costs would fall for 2013 and again for 2014.

Quarterly risk provisions rose 7 percent to 430 million euros, and the operating result for the first half - it did not give a second-quarter number - was 1.64 billion euros, down 6 percent year on year.

"Operating result is in line as weaker net interest income was offset by lower expenses, but it feels like some kitchen-sinking on the amount of 'other losses'," Berenberg analyst Eleni Papoula wrote in an email.

Erste Bank shares traded down 1.3 percent at 22.54 euros by 1200 GMT, underperforming a 0.5 percent weaker European banking index .SX7P.

(Additional reporting by Krisztina Than; editing by Maria Sheahan and Tom Pfeiffer)

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