Bloomberg News

Erste Slumps as Hungary, Romania Trigger $1.1 Billion Loss

October 10, 2011

(Closes shares in first, fifth paragraph.)

Oct. 10 (Bloomberg) -- Erste Group Bank AG, eastern Europe’s second-biggest lender, plummeted in Vienna trading after saying that it expects to post a full-year loss of as much as 800 million euros ($1.1 billion).

Writedowns and provisions, including bad debt charges of 450 million euros in Hungary, totaled 1.6 billion euros, the Vienna-based bank said in a statement today. Erste won’t pay a dividend for 2011 and shelved for at least a year a plan to repay 1.2 billion euros of aid from the Austrian government.

Chief Executive Officer Andreas Treichl said Erste doesn’t need further state aid as European Union leaders devise a plan to recapitalize the region’s banks amid growing concern Greece is headed to a default. The writedowns mean Austria’s biggest lender will post its first full-year loss since at least 1988 and compares with analysts’ expectation for net income of 980 million euros, according to data compiled by Bloomberg.

“The set of measures seem to be a broad-based cleanup, part of which should have been done much earlier,” Gabor Kemeny, an analyst at Concorde Securities, said in a note to investors. “Erste would be a candidate for recapitalization, if EU leaders decided to shore up banks’ capital.”

Erste fell 9.2 percent to 18.80 euros at the 5:30 p.m. close of trading in Vienna, making it the second worst performer on the 46-company Bloomberg Europe Banks and Financial Services Index, which rose 2.3 percent. Austrian rival Raiffeisen Bank International AG fell 4.7 percent.

Capital Position

Including state capital, Erste’s core tier 1 capital ratio, a measure of financial strength, will be 9.2 percent at the end of December, down from 9.5 percent at the end of June, the bank said. The lender will be “able to” again report quarterly earnings of 250 million euros from next year, Treichl said.

Erste, which relies on the former communist part of Europe for more than half of its earnings, made the writedowns because of “unprecedented government intervention” in Hungary and a slower than expected recovery in Romania, the bank said.

“This isn’t a time for question marks, especially not for question marks over banks’ balance sheets,” Treichl told reporters in Vienna, adding that he hasn’t offered to resign. “We’re investing a year’s worth of profit into extraordinary measures.”

Hungary Writedowns

Erste, which trails only UniCredit SpA in eastern Europe, last posted a quarterly loss in the three months following the collapse of Lehman Brothers Holdings Inc. Earnings came under pressure as Hungary’s government forces lenders to take losses on Swiss-franc denominated mortgages after imposing a tax on banks last year.

Erste is writing off its remaining 312 million euros of goodwill in Hungary and will also inject 600 million euros of fresh capital into its business, the country’s fourth-biggest bank.

“Continued and increasing government intervention in the Hungarian banking market has led Erste Group’s management board to reassess the medium-term prospects of Hungary,” it said in the statement. The bank said it will “focus on lending in local currency funded from locally sourced liquidity” in the future, adding that it’s prepared to lose market share.

State Aid

Erste was the first bank in Austria to get the non-voting participation capital from the state in 2009, along with 540 million euros from private investors. CEO Treichl said on July 29 he had achieved consensus with the Finance Ministry on repaying the state’s portion and was waiting for approval from the financial regulator and the central bank, which he expected as soon as this quarter. Twelve out of 15 analysts polled by Bloomberg News last week expected it to keep the aid this year.

Erste said today it will postpone repayment because of “resurfacing uncertainties about the global economic outlook and the lack of any resolution of global sovereign debt issues.”

The lender, which paid shareholders 70 cents a share for 2010, won’t pay a dividend for 2011, it said. Treichl said this wouldn’t be a problem for the private foundation that is Erste’s biggest shareholder and relies on the dividends to service debts.

Erste, which paid six times book value in 2006 to buy Romania’s biggest lender, will write down goodwill related to that deal by 627 million euros after tax this year. That leaves 1.1 billion euros of goodwill on its books, the bank said.

Romania Slowdown

The writedown is due to “a slower than expected economic recovery and the corresponding weaker performance of the Romanian banking market,” Erste said. It will also inject 100 million euros of capital into Banca Comerciala Romana SA.

The bank agreed last month with four Romanian investment funds to buy their 24.1 percent stake in BCR for 435 million euros in cash and shares. That plan remains intact, Erste said.

Erste is also reclassifying 5.2 billion euros of credit default swaps it has written to guarantee government and bank bonds. That means restating past results, with a cumulative loss of 149 million euros until 2009, an after-tax loss of 132 million euros last year and a loss of 180 million euros in the first nine months of 2011.

It plans to sell the CDS assets “in an accelerated manner,” the bank said. Erste’s exposure to Greece, Ireland and Portugal stood at about 600 million euros at the end of September, mostly carried at market value.

--With assistance from Jonathan Tirone in Vienna. Editors: Dylan Griffiths, Zoe Schneeweiss

To contact the reporter on this story: Boris Groendahl in Vienna at bgroendahl@bloomberg.net

To contact the editor responsible for this story: Angela Cullen at acullen8@bloomberg.net


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