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UPDATE 2-Erste slimming regime weighs on outlook
April 30, 2012 / 6:15 AM / 6 years ago

UPDATE 2-Erste slimming regime weighs on outlook

* Sees 2012 operating profit stable rather than firmer

* Q1 operating profit slips to 915.7 mln euros as trading income falls

* Q1 net profit up 7.8 pct to 346.5 mln eur vs poll avg 301 mln

* Bad debt provisions rise 26 pct, mainly due to Hungary and Romania (Adds details and background)

By Michael Shields

VIENNA, April 30 (Reuters) - Erste Group Bank has turned more cautious in its outlook for 2012 after pulling back from some non-core activities that will hit income generated from interest payments and commissions.

Emerging Europe’s No.2 lender now expects stable rather than slightly higher operating profit for 2012, it said on Monday.

“We’re basically a bit more cautious now after having swallowed the effect of the reduction in our non-core business in the first quarter,” Chief Executive Andreas Treichl said on a conference call. “Therefore we have slightly revised down from a better operating income to flat.”

Banks across Europe are having to shrink their balance sheets by selling off assets or by cutting back on certain activities to meet tough new capital rules designed to help banks withstand future financial troubles.

The CEO said Erste had “very substantially” reduced risk-weighted assets at some of its non-core business, which affected net interest and commission income.

An Erste spokesman said the reduction was mostly in the bank’s syndicated lending business.

Erste reported first-quarter net profit rose 7.8 percent to 346.5 million euros ($459.4 million), beating the average estimate of 301 million in a Reuters poll of analysts, helped by 250 million euros in one-off income from buying back hybrid debt.

Its capital ratio as defined by the European Banking Authority climbed to 9.7 percent at the end of the quarter, Erste said. Its core Tier 1 capital - a key measure of financial strength - got a boost from “the recognition of collateral in Romania in line with international rules (IFRS) and the Austrian Banking Act.”

Even after stripping out the Romanian effect and excluding retained earnings, its EBA capital ratio stood at 9.1 percent, above the minimum 9 percent required by mid-year, it said.

The CEO told analysts the bank would continue to reduce its balance sheet in non-core businesses and would have to compensate with increased lending activity in its main business, where he expected low-to-mid-single-digit loan growth.

In the first quarter, the bank cut risk-weighted assets by 2.3 billion euros.

Erste said it expected the economies in its core markets - except Hungary and Croatia - to grow this year, although more slowly than in 2011.

Operating profit slipped to 915.7 million from 1.03 billion a year earlier, mostly due to weaker net trading income versus a year-ago period which was flattered by valuation gains.

It expected bad debt provisions to decline to about 2 billion euros in 2012, “but (they) will still be impacted by extraordinary provisioning requirements in Hungary (75.6 million euros in Q1 2012) and by the slow economic recovery in Romania.”

In the quarter, the bank booked the full amount of the hit it expected from Hungary’s scheme to let borrowers repay performing foreign currency loans at below market rates. It said it did not expect to make provisions for municipal loans there.

Erste lost 82 million euros in Hungary and 72 million in Romania in the quarter. It reiterated it did not expect to make money in Hungary before 2014.

Erste said net income and capital ratios “will be further supported by one-off income in the order of 160 million euros(pretax) from the buy-back of additional tier 1- and tier 2-instruments in the second quarter of 2012.”

Erste shares turned lower after a firm start and were down 1.1 percent at 16.95 euros by 0915 GMT, while the Stoxx European banking sector index eased 0.7 percent.

Erste has been trading at just over 7 times 12-month forward earnings, a premium to rival Raiffeisen Bank International (RBI) on 6.4 times, according to Thomson Reuters StarMine, which weights estimates by analysts’ previous accuracy.

Its sovereign exposure to euro zone periphery countries fell to 145 million euros at the end of March, with Italy accounting for 71 million and Ireland 61 million. ($1 = 0.7542 euros) (Reporting by Mike Shields. Editing by Hans Juergen-Peters and Jane Merriman)

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