* Upbeat on Russia, biggest single profit source in H1
* H1 net profit rises by a third as bad loan provisions fall
* Expects profit in Hungary despite rising costs (Recasts with comments from news conference)
By Michael Shields and Angelika Gruber
VIENNA, Aug 6 (Reuters) - Bank Austria, the central and eastern Europe (CEE) arm of Italian bank UniCredit, expects to keep making solid profits in Russia despite Western sanctions, thanks in part to its ability to raise money locally, though it warned of lost opportunities.
Bank Austria’s first-half pretax profit in Russia rose 3 percent to 247 million euros ($330 million), more than a quarter of the total and making it the bank’s single most profitable market. Russia also accounted for most of its CEE loan growth in the period, officials told a news conference on Wednesday.
“Given what we know now about sanctions, we assume that in Russia we will continue to have a very significant profit contributor. We feel we are set up well,” Chief Executive Willibald Cernko said.
He was referring to sanctions the European Union imposed on Moscow to punish support for rebels in eastern Ukraine. The situation remained tense amid warnings from Poland and NATO that Russian troops could invade Ukraine.
Cernko said the Russia business had a solid portfolio, was well capitalised and could refinance locally, ensuring profits there were sustainable.
However, he cited comments from parent Unicredit on Tuesday that sanctions against Russia could cost the group 10-15 million euros in lost revenue opportunities.
Bank Austria lost 29 million euros before tax in Ukraine, where talks to sell its local unit continued.
In a research note, Berenberg analysts said UniCredit was among the European banks most exposed to Russia, second only to Raiffeisen Bank International in terms of Russian loans as a percentage of book value and assets.
Berenberg said the direct impact of Russian sanctions would be limited, but the indirect fallout could include weaker demand for debt, funding restrictions and deteriorating asset quality.
Bank Austria saw pretax profit in Turkey fall 28 percent in the firat half to 175 million euros, but said this reflected regulatory changes and did not expect results to keep declining.
In Hungary, pretax profit fell 60 percent to 12 million due to a stiff bank levy and as it set aside 30 million euros for costs of a law forcing banks to compensate customers for mispriced loans. Finance chief Francesco Giordano said the bill for the law may rise in the second half but this was unclear.
Cernko ruled out any talk of exiting Hungary and reiterated Bank Austria would make a profit there this year in any event.
Gianni Franco Papa, head of its market-leading CEE division, said the region’s economic environment was starting to pick up.
“Although the geopolitical tensions in Ukraine call European and CEE growth into question, the macroeconomic scenario has become more encouraging,” said Papa, set to become group head of investment banking next year.
Bank Austria generated net profit of 426 million euros in the second quarter, bringing first-half net profit to 776 million, up 34 percent as falling writedowns for bad loans offset a 4 percent dip in operating income.
Parent UniCredit on Tuesday beat earnings forecasts with a 12 percent increase in second-quarter net profit.
Bank Austria’s net writedowns of loans and provisions for guarantees and commitments in the first six months fell 35 percent to 332 million euros. In central and eastern Europe, net loan writedowns fell by a quarter to 300 million due to higher releases of provisions in several countries, especially Croatia.
The provisioning charge in its Austrian customer business shrank 72 percent to 32 million euros due to higher releases of previous provisions and a lower new volume of impaired loans.
1 US dollar = 0.7488 euro Editing by Mark Potter