UPDATE 5-Investors punish Erste for new emerging Europe hit

Fri Jul 4, 2014 10:32am EDT

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By Michael Shields

VIENNA, July 4 (Reuters) - Investors wiped more than 1 billion euros ($1.4 billion) off Erste Group's market value and took evasive action against rivals on Friday on concerns the bank's warnings about Hungary and Romania could echo across the sector.

Austria's Erste, emerging Europe's third-biggest lender, said late on Thursday it could post a record net loss of up to 1.6 billion euros this year due to a law cutting bank charges in Hungary and higher provisions for soured loans in Romania.

The charge in Romania was due to the central bank there clamping down on non-performing loans ahead of a European Central Bank review of large European banks, Erste said. The Romanian central bank declined to comment.

Erste was the biggest loser among European bank stocks, tumbling more than 16 percent to a 12-month low of 19.52 euros in afternoon trading and pulling Austria's benchmark ATX down more than 3 percent.

"The latest profit warning reduces significantly the book value and will also likely lead to the stock derating versus the EU banking sector, until Erste shows stability in the operating performance and an end to cleaning up exercises," Barclays said in a note.

The ECB review is forcing banks to take a harder look at their loan books. Investors expect banks to flag additional costs to deal with any problems before the overall results of the tests are announced in October.

Hungary's parliament, meanwhile, approved a bill on Friday that will cut bank charges on foreign-currency and forint-denominated loans to compensate borrowers after the Supreme Court ruled that banks had unfairly charged them.

The law is only the first step in a comprehensive scheme to help borrowers. Analysts at Barclays said Erste faced a risk of more losses in Hungary given that the final rules for phasing out foreign-currency mortgages have yet to be unveiled.

The developments in Romania and Hungary mean that Erste has to raise its risk costs from a planned 1.7 billion euros to about 2.4 billion this year.

More banks are expected to increase provisions from the Hungarian moves, which the central bank said could cost banks 600 billion to 900 billion forints ($3.95 billion). That is potentially twice analysts' estimates of 400 billion.

However, the bank told Reuters that this new burden will not pose a risk to the stability of the banking system, and none of the country's banks would need significant additional capital.

Shares in Raiffeisen Bank International <RBIV.VI > (RBI) were off lows but still down 3.8 percent in afternoon trade. It said its Romanian business was expected to make a profit again this year.

RBI, emerging Europe's second-biggest lender said it would need a few more days to assess the impact of the Hungarian law.

Other lenders exposed to Hungary, including Belgium's KBC and Italy's UniCredit, emerging Europe's largest lender, have not commented on the impact of the law. Their stocks were down more than 3 percent.

CHALLENGING REGION

Erste's warning was another reminder of the challenges of operating in central and eastern Europe, a region that generated fat profit margins for banks for years after the Iron Curtain fell but now causes headaches as the region's economy struggles.

Telekom Austria and utility EVN both issued profit warnings in the past two weeks due to conditions in eastern Europe and shares of banks active in the region have underperformed the European sector by around 15 percent this year, according to analysts at UBS.

Erste, which last year raised capital to repay state aid and strengthen its balance sheet, said it did not need to raise fresh equity but would not be paying a dividend for 2014. Analysts had previously expected a profit of around 570 million euros and a 37 cent dividend.

At its annual shareholder meeting in May, Erste Chief Executive Andreas Treichi said European bank tests were slanted against banks like his because markets in central and eastern Europe were being tested against a bigger fall in output than countries such as Greece and Italy.

Treichi said on Friday he wanted to remain as CEO despite the surprise warning.

Erste did warn in its prospectus for last year's rights issue that it could face more writedowns in Romania. French rival Societe Generale booked higher provisions in Romania at the end of last year.

"The bank (Erste) is being forced to sell 25 to 30 percent of its non-performing loans while also increasing the provisioning coverage on the remaining non-performing loans," said Jean-Pierre Lambert, an analyst at Keefe, Bruyette & Woods. ($1 = 227.9600 Hungarian forints) ($1 = 0.7331 euros) (Additional reporting by Georgina Prodhan and Angelika Gruber in Vienna, Radu Sorin Marinas in Bucharest, Lionel Laurent in London and Maria Pia Quaglia in Milan; Editing by David Holmes, Susan Fenton and Jane Merriman)

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