UPDATE 4-Erste sinks as unveils $412 mln Iceland exposure
* Erste Group Bank holds 300 mln euros of Iceland bank debt
* Sticks to 2008 guidance
* To update company guidance with Q3 results
* Shares down as much as 17 pct, pare losses in afternoon
(Rewrites with Erste reiterating guidance, updates shares)
VIENNA, Oct 10 (Reuters) - Austria's Erste Group Bank (ERST.VI) reiterated its 2008 outlook on Friday after unveiling it holds 300 million euros ($412 million) in Iceland bank debt. Its shares dropped as much as 17 percent but later pared losses.
Erste, the third-biggest lender in emerging Europe, cut its 2008 profit forecast on Tuesday, while Iceland edged towards financial meltdown over the week and the government seized control of three of the country's biggest banks.
"Obviously this is not good for investor confidence," said analyst Marion Swoboda-Brachvogel of brokerage CA Cheuvreux. "They gave a profit warning just a couple of days ago and now this. You've got to wonder, what comes next?"
Analysts' estimates varied widely regarding the level of writedown the bank would be likely to incur on its Iceland debt, ranging from 50 percent of its value to the full amount.
Erste tried to calm the waters later in the day, saying most of the possible losses from the Icelandic exposure were already reflected in Tuesday's earnings outlook, and its shares pared losses to trade down 7.4 percent by 1422 GMT.
This compared with a 6.8 percent drop in the DJ Stoxx European banks index .SX7P, in which heavyweights including the Royal Bank of Scotland (RBS.L), Deutsche Bank (DBKGn.DE) and UniCredit (CRDI.MI) fell even more.
Swoboda-Brachvogel said she expected Erste to write down the Iceland debt by at least 50 percent, but possibly more, and that this would reduce Erste's net profit by at least 6 percent.
Wood & Co analyst Jiri Stanik, who revealed Erste's exposure in a note to clients on Friday morning, said his base case was a total writedown of the debt, which would lead to a 20 percent reduction in net profit.
"I admit this is a worst-case scenario, but this is right now my base-case scenario," Stanik said.
Erste said it would give an update on its targets with the release of its third-quarter results due on Oct. 30.
PROFIT WARNING
Erste said its Iceland exposure was split between the country's major banks, and that it was currently impossible to determine the recovery rate for the debt.
"Erste Group's exposure to Iceland, mainly in the form of senior bank debt split between the major Icelandic banks, is limited to 300 million euros," Erste said in a statement.
"As the settlement procedures have not yet started, recovery rates are (yet) to be determined."
Erste spokesman Michael Mauritz later added: "There is no change in the guidance. The Iceland exposure is to a large extent already reflected in Tuesday's profit forecast."
Implied recovery rates of Icelandic banks, which are based on the prices of credit default swaps, stood at 18 percent for Kaupthing KAUP.IC senior debt, 16.5 percent for Landsbanki LAIS.IC senior debt, and 13.3 percent for Glitnir GLB.IC senior debt, according to data from Markit.
Regulators and banks across Europe were scouring balance sheets this week to identify their exposure to Iceland bank debt.
Finnish financial watchdog Rata said on Friday the Nordic banking sector's exposure was 210 million euros, and that it was impossible to estimate the losses that would generate.
Erste's Austrian peer Raiffeisen Zentralbank (RZB), the parent of listed Raiffeisen International (RIBH.VI), said on Friday it holds Icelandic bank debt but declined to say how much and said its capital ratio targets were not in danger.
Erste Bank had on Tuesday cut its 2008 earnings outlook, saying it now expected net profit to rise "only slightly" after previously forecasting a 20 percent rise, adjusted for the one-off gain from the sale of an asset.
It blamed the financial markets crisis for the profit warning, saying that weak global markets would weigh on its trading result and lead to further writedowns of its portfolio of U.S. debt instruments. (Additional reporting by Eva Komarek in Vienna, Jane Baird in London and Tarmo Virki in Helsinki; Editing by John Stonestreet and Quentin Bryar)
