UPDATE 3-Subdued outlook sends Erste shares reeling
* Sees 2014 operating profit of about 3.1 bln euros
* Sees risk costs falling by up to 5 pct, steady lending
* Proposes halving dividend after 2013 profit slump
* Shares down 11 percent (Recasts with market reaction, CEO comments)
VIENNA, Feb 28 (Reuters) - Austrian lender Erste Group's subdued earnings guidance despite an economic upturn in its core region of central and eastern Europe (CEE) sent its shares reeling on Friday.
CEE's third-biggest lender said it expects operating profit to remain steady this year at about 3.1 billion euros ($4.24 billion) with lending to customers staying flat.
Erste proposed halving its dividend to 0.2 euros per share after 2013 net profit slumped 87 percent to 61 million euros, as the bank had flagged on Feb. 11.
"We have pushed down market expectations for 2014 substantially, and that in an environment in which the economic indicators in our region are actually positive," Chief Executive Andreas Treichl told reporters.
The bank's shares fell 11 percent to 25.45 euros by 1425 GMT, the worst performers by far in a Stoxx European banking sector index that was down 0.5 percent.
Erste posted a fourth-quarter loss of 369 million euros after risk provisions jumped nearly 18 percent from the third quarter, mainly for the large corporate and commercial real estate business and at its savings banks.
Its non-performing loan (NPL) ratio was stable in the second half but still rose to 9.6 percent at year-end, against 9.2 percent a year earlier. Its NPL coverage ratio improved to 63.1 percent from 62.6 percent.
Erste expected a moderate economic pick-up of 1.7 percent on average in the region this year.
Citing the imminent European Central Bank-led health checks of big euro zone banks' balance sheets, Erste said it expects risk costs to decline by no more than 5 percent this year, to about 1.7 billion euros.
Treichl said Erste should know by mid-year the likely impact of the so-called Assets Quality Review.
Chief Risk Officer Andreas Gottschling cited the example of one eastern European country, which he declined to name, telling Erste to add provisions on what it considered perfectly good loans, because of regulatory concerns about collateral or long maturities.
"This has shaken our belief in the process a little bit, and that is why we are more cautious now," he said in an analysts' conference call.
Writedowns and tax effects hit the bottom line in 2013, and its tax burden again poses difficulties this year, the bank said. It does not expect to recognise deferred tax assets in the Austrian tax group this year, which would lead to a "significantly elevated" tax rate of about 40 percent.
But a decline in banking taxes from 311 million euros in 2013 to about 270 million this year should benefit net profit.
Erste, which sold its Ukrainian business last year, said its core Tier 1 capital ratio under Basel 2.5 rules improved to 11.4 percent of risk-weighted assets. Its common equity tier 1 ratio under new Basel 3 standards stood at 10.8 percent.
Erste hit its goal of making money in Romania in 2013 but still faced problems in Hungary, where its full-year loss nearly doubled to 109 million euros, hit by a 45.5 million euro financial transaction tax bill on top of a 49 million bank levy. ($1 = 0.7309 euros) (Additional reporting by Angelika Gruber; Editing by Georgina Prodhan and David Goodman)