May 4, 2018 / 6:33 AM / a year ago

UPDATE 2-Rising costs overshadow net profit jump at Erste Group, hurting shares

(Recasts, adds share price fall, detail)

VIENNA, May 4 (Reuters) - Rising costs at Austrian lender Erste Group in the first quarter overshadowed a bottom line bolstered by less risk provisioning, hurting its shares on Friday.

Despite net profit rising by more than a quarter to 332.6 million euros ($398.6 million), slightly above an average forecast of of 311 million euros in a Reuters poll of analysts, operating profit fell 2 percent and operating expenses increased 5 percent.

Although the company repeated that its operating expenses should fall over 2018 as a whole, its shares took a beating. By 0802 GMT they were down 5.3 percent at 37.93 euros in a weaker banking sector.

“Personnel expenses were ... up. With unemployment rates in most of our core markets low, further upward pressure is to be expected,” Chief Executive Andreas Treichl said. “The costs of IT-related projects — many of them driven by regulatory requirements — remained substantial.”

Those expenses were the flip-side of robust economic growth in Austria and eastern Europe, where Erste operates. That had a positive effect on loan demand and loan quality, which enabled it to reduce its risk provisioning.

“Demand for loans continues to be strong, particularly in the Czech Republic and Slovakia,” Treichl said. “By far the biggest contribution came, however, from an exceptionally benign risk environment, which resulted in net releases.”

The impairment result from financial instruments, normally a negative figure, turned positive, reaching 54.4 million euros in the quarter, compared with a write-down of 65.8 million euros a year earlier.

Despite the rising costs and a lower core capital ratio, Erste said it was “excellently positioned” to meet its targets for 2018 of a higher dividend and a return on tangible equity (ROTE) above 10 percent. ROTE rose to 11.8 percent from 10.3 percent in the previous quarter.

“Overall, all the conditions needed for a continuing positive development are in place,” Treichl said, citing a non-performing loans ratio of 3.7 percent and solid economic growth forecasts for countries Erste operates in. ($1 = 0.8344 euros) (Reporting by Francois Murphy; Editing by Kevin Liffey and Adrian Croft)

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