Bloomberg News

Erste Aims to Fill $1 Billion Gap Without Taking State Aid

October 28, 2011

(Closes shares in fifth paragraph.)

Oct. 28 (Bloomberg) -- Erste Group Bank AG will avoid state aid “at all cost” as eastern Europe’s second-biggest bank plugs a 750 million-euro ($1 billion) capital shortfall caused by a third-quarter loss.

Erste estimates the gap widened from the 59 million euros calculated by the European Banking Authority for June 30 after the Vienna-based bank posted a quarterly loss of 1.49 billion euros on writedowns and charges, Chief Executive Officer Andreas Treichl said on a conference call today.

“The next tranche of state capital will be substantially less friendly -- I will avoid this at all cost,” said Treichl, when asked if he would seek support from the Austrian government following a capital injection in 2009. Erste can fill the gap with retained earnings over the next three quarters, he said.

Erste needs the extra funds to meet an EBA requirement for banks to hold 9 percent in core capital after sovereign-debt writedowns by the middle of next year. The bank’s stock fell in Vienna trading as the CEO’s comments raised concern the bank may be forced to sell shares to meet that target, according to Daniele Brupbacher, a Zurich-based analyst at UBS AG.

Erste dropped 5.7 percent to 17.10 euros at the 5:30 p.m. close in Vienna, the biggest drop in two weeks, after climbing 10 percent yesterday. The stock is down 51 percent this year, more than twice the 24 percent drop in the Bloomberg Europe Banks and Financial Services Index over the same period.

Key Risk

“Treichl’s remarks imply that if push comes to shove and he can’t reach 9 percent otherwise, he may sell new shares,” Brupbacher said in an e-mailed response to questions. That’s “because he doesn’t want new government money,” he said, adding that Erste’s capital position is a “key risk.”

Treichl didn’t directly answer questions on the conference call asking whether he would sell new shares. Erste is still considering how big a cushion it wants in excess of the 9 percent required by the EBA, he said, adding that the bank might also narrow the capital gap by reducing assets.

Erste received 1.2 billion euros in non-voting state capital in 2009 and canceled plans to repay it this year when it announced the loss on Oct. 10. Austrian central bank Governor Ewald Nowotny said Oct. 25 that there was a “consensus” in Europe that more state aid would only come as common stock, diluting existing shareholders.

The 1.6 billion euros of bad-loan charges, credit-default- swap losses and writedowns on its Hungarian and Romanian units announced earlier this month will lead to a full-year loss of as much as 800 million euros, the bank reiterated today.

‘Mind-boggled’

Erste said it has reduced its CDS book to 300 million euros as of yesterday, from 5.2 billion euros at the end of September, and aims to close it over the next few days. The sale since the end of September, and the closing of the portfolio will cause no additional losses, Treichl said.

Erste and Treichl are being probed by Austria’s financial supervisor over the CDS accounting and because the bank’s announcement of the writedowns came less than two weeks after the CEO forecast a profit. JPMorgan Chase & Co. analysts led by Paul Formanko have said Erste should have marked its CDS to market prices “years earlier,” according to a note last week.

“I know we got a lot of criticism, I know that a lot of investors were just mind-boggled” about how Erste accounted for the CDS, Treichl said. “We do have to accept the fact that we caused a lot of concern.”

Bonus Cut

Treichl and his management board colleagues are returning 35 percent of their bonus for 2010 because the CDS were rebooked at market prices, which resulted in a retroactive reduction of last year’s net income by 12 percent to 988 million euros, Erste spokesman Michael Mauritz said.

Erste’s 1.49 billion-euro third-quarter loss compares with restated net income of 324.9 million euros a year earlier, Erste said. The average estimate of nine analysts surveyed by Bloomberg was for a 1.42 billion-euro loss. Net interest income, Erste’s biggest revenue source, rose 2.3 percent to 1.43 billion euros as margins improved. Fee and commission income dropped 1.4 percent to 445.9 million euros.

Delinquent loans expanded to 8.2 percent of all lending by the end of September, from 7.9 percent three months earlier, mostly because of bad debt in Hungary and Romania.

Treichl said he expected years of losses in Hungary because of the actions of Prime Minister Viktor Orban’s government. Hungary has imposed a special tax on banks and is forcing lenders to take losses if holders of Swiss franc-denominated mortgages convert them into forint at below-market rates.

Romanian Hopes

Erste had entered 2011 hoping for a return of credit growth and a decline of bad debt in the former communist part of Europe, which brings in most of its revenue. It scrapped both forecasts over the year as the situation in Hungary and Romania deteriorated and the crisis in the euro area deepened.

Treichl said he was more hopeful for Romania, where 22 percent of Erste’s loan book is overdue. Erste will “dedicate all resources” to “show substantially improved results” in the country, he said, adding “we continue to be firm believers that our Romanian business will ultimately be a success.”

Earnings will benefit in the future from “reduced volatility” once the CDS portfolio is unwound, the bank said, without providing guidance on profit next year.

--With assistance from Zoe Schneeweiss in Vienna. Editors: Dylan Griffiths, Keith Campbell.

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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