October 10, 2011 / 8:56 AM / 6 years ago

UPDATE 2-Erste warns of $1 bln loss after debt writedowns

* Sees 2010 net loss of 700-800 mln euros

* To delay repayment of state capital, skip dividend

* Shares fall more than 14 pct

By Michael Shields and Sylvia Westall

VIENNA, Oct 10 (Reuters) - East European lender Erste Group Bank warned on Monday it would make a net loss this year of up to 800 million euros ($1 billion) and not pay a dividend after taking hits on its foreign currency loans in Hungary and euro zone sovereign debt.

The Austrian bank’s shares were down more than 14 percent at 17.75 euros by 0850 GMT, when the Stoxx 600 Europe banking sector index was down less than 0.7 percent.

“This is clearly disappointing news. In our view, today’s announcement is likely to trigger a cycle of ratings downgrades and renew concerns over capital in the light of worsening operation environment in eastern Europe,” GFI Research said.

The Austrian lender scaled back and marked down to market values nearly all its exposure to the sovereign debt of struggling euro zone countries, changed the way it handles credit default swaps, and took big writedowns in Hungary and Romania.

The kitchen sink approach and volatility on financial markets means Erste will delay for at least a year repaying 1.2 billion euros in non-voting capital which it got from Austria during the global banking crisis and skip a 2011 dividend, it said in a statement.

The steps will not trigger demand for more capital at group level, it said.

Due to a “continued strong underlying operating profitability” its core tier 1 capital solvency ratio was set to end 2011 at 9.2 percent of assets, the same level as a year before.

The market had expected a 2011 net profit of 967 million euros and a dividend of 70 cents per share, according to Thomson Reuters data.

Erste cut its sovereign exposure to Greece, Portugal, Spain, Ireland and Italy to 0.6 billion euros as of the end of September and marked 95 percent of this down to market value levels. Its combined exposure to Greece and Portugal was only 10 million euros.

However, Erste Bank will suffer a 500 million-euro ($675 million) loss at Hungarian unit, which will now get about 600 million euros of new equity, following the local government’s move to let its domestic borrowers repay their foreign-currency loans at below market rates.

It will write down its entire 312 million euros in Hungary-related goodwill and boost risk provisions there by 450 million even while fighting the new law, it said.

Austrian peer Raiffeisen Bank International also plans to inject capital into its Hungarian unit as a result of the controversial law, its finance chief was quoted as saying last week.

Raiffeisen, whose shares fell more than 10 percent, had no immediate comment on Erste’s moves.

In Romania Erste said a slower than expected economic recovery meant that it would have a 700 million euro pretax writedown of goodwill.

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