* Goes back on April guidance for outlook, cash call
* Plans 660 mln euro rights issue if conditions allow
* To repay 1.76 bln euros in non-voting capital in Q3
* Operating profit seen down as much as 5 percent
* Shares fall nearly 10 percent
By Michael Shields
VIENNA, June 24 Erste Group Bank on Monday reversed guidance from just two months ago, saying it plans a cash call to help repay emergency state funding and that operating profit will fall this year rather than hold steady.
Its stock fell almost 10 percent, roughly matching what analysts say will be the extent of earnings dilution from the new shares.
Central and eastern Europe's No. 3 lender said it will raise about 660 million euros ($867 million) in equity in the third quarter and that operating profit will fall as much as 5 percent this year.
The bank said it would repay 1.76 billion euros in non-voting participation capital it raised in 2009 to help it weather the financial crisis. Austria provided two thirds and private investors the rest.
The stock fell as much as 9.6 percent to 19.85 euros and was off 7.4 percent by 1325 GMT, against a 1.4 percent fall for the Stoxx European banking sector index.
Analyst Dirk Becker at Kepler Cheuvreux said it was disappointing that Erste had gone back on its promise not to issue shares, and that Austrian regulators had told the bank to replace at least a third of crisis funding from 2009.
"The short-term performance of the stock could now be negative because of the upcoming rights issue but we believe the long-term story remains attractive," he told clients in a note, keeping his "hold" rating.
Erste and the Austrian central bank declined comment on whether regulators had insisted on a rights issue to replace part of the aid. Finance Minister Maria Fekter called the repayment "more than positive for taxpayers".
Erste said it expected a slight improvement in economic performance in central eastern Europe in the second half, even though growth rates would remain moderate.
"Erste Group expects the operating result to decline by up to 5 percent in 2013, due to expected lower operating income only being partially off-set by lower operating cost," it said.
Its risk costs were set to fall about 10-15 percent in 2013, mainly due to improvement in Romania, where it reiterated it expected to make a profit this year.
EYES ON RAIFFEISEN
Erste said repaying increasingly expensive capital would save 149 million euros after tax in 2014 and 158 million in 2015, rising in subsequent years, and was expected to help improve earnings per share from 2014.
Its rights issue was "subject to market conditions and the approval by its management and supervisory boards", it said.
"The planned capital increase ... will further strengthen Erste Group's capital base so that Erste Group expects to meet its targeted 10 percent fully loaded Basel 3 common equity Tier-1 ratio by December 31, 2014," it said, referring to meeting new capital adequacy rules.
ING analysts questioned whether Erste's move would prompt Austrian peer Raiffeisen Bank International (RBI) under its new management to "make a copycat move to tap equity markets and repay its chunk of participation capital".
Erste has been trading at nearly 10 times 12-month forward earnings, a premium to RBI on nearly 8 times, according to StarMine, which ranks analyst estimates by forecasting accuracy.
Raiffeisen - which got 2.5 billion in participation capital, of which 1.75 billion came from the state - declined to comment except to reiterate that a capital increase was an option depending on market conditions.
Deutsche Bank said it did not expect Raiffeisen take any action on its balance sheet until Chief Executive Karl Sevelda had a chance to put his new organisational structure in place.
"The pressure to act will, however, clearly have risen following Erste Group's planned capital increase," it said in a research note. RBI shares fell 2.7 percent to 23.235 euros.
J.P. Morgan Securities, Morgan Stanley Bank and Erste itself will run the Erste capital increase.
Adjusted for proceeds from the capital hike, Erste's core Tier 1 ratio under capital adequacy rule Basel 2.5, excluding participation capital and retained earnings in the first quarter, would be 10.2 percent instead of 9.6 percent, it said.
Erste estimated the switch to Basel III standards would have a negative impact of 30 basis points. It is also switching its method of calculating risk-weighted assets in Romania in 2015, which would have a negative impact of about 40 basis points.