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Erste Group Bank AG (EBS), eastern Europe’s second-biggest lender, said it’s closer to filling its capital gap after it posted a 4 percent increase in fourth- quarter net income, beating analysts’ estimates.
Erste’s shares rose as it narrowed the capital shortfall found by the European Banking Authority to 166 million euros ($224 million) by the end of 2011 from 743 million euros three months earlier, according to a statement from Vienna-based Erste today. Retained earnings and 5.8 billion euros of asset reductions brought its capital ratio to 8.9 percent under EBA rules, close to the 9 percent it must reach by June 30.
“We see absolutely no problem to not only reach but exceed the 9 percent goal,” Chief Executive Officer Andreas Treichl told journalists in Vienna. “We’ll have additional earnings in the first half of the year, and have another 3 billion euros of non-core assets we can reduce.”
Treichl is filling a capital hole at Erste that widened in October as writedowns in Hungary and Romania and on undisclosed credit-default swaps led to a full-year loss in 2011. He vowed to avoid diluting shareholders through taking further state aid or selling new shares, and to meet capital requirements mostly with retained earnings.
Net income rose to 254.1 million euros in the three months ended Dec. 31 from 244.9 million euros a year earlier, driven by rising net interest income and falling provisions for bad loans, Erste said. The average estimate of 11 analysts surveyed by Bloomberg called for a decline to 228 million euros.
“The EBA issue is simply over,” said Daniele Brupbacher, an analyst at UBS AG who cut Erste to “neutral” from “buy” on Feb. 16. “This went more quickly than I thought, and they also seemed to reduce risk-weighted assets by more.”
Erste jumped 78 cents, or 4.3 percent, to 18.835 euros at the 5:30 p.m. close of Vienna trading. The stock has advanced 39 percent this year, outperforming the 43-member Bloomberg Europe Banks and Financial Services Index, which rose 17 percent.
Erste said it boosted its capital ratio by reducing risk- weighted assets in business areas it doesn’t focus on. It reduced short-term interbank lending, sold credit-default swaps and “optimized” capital allocation. Lending to customers, which the bank sees as its main revenue source, was little changed in the last quarter. The biggest decline was in Hungary, where customer loans shrank 8 percent.
Even as Erste expects to exceed the EBA’s capital target, Treichl said there is still so much regulatory uncertainty that he’d rather wait before paying back 1.2 billion euros of state aid he received in 2009. Excluding that aid and similar non- voting capital, Erste’s core Tier 1 capital rose 0.1 percentage points to 7.8 percent by the end of the year.
Treichl also said he’ll wait until there is more regulatory clarity on capital matters before giving a target for 2012 dividends. He and other board members won’t get a bonus for this year.
The fourth-quarter profit narrowed Erste’s full-year loss to 718.9 million euros, within the range of 700 million euros to 800 million euros the bank predicted on Oct. 10.
Erste said it expected core markets in central and eastern Europe to grow next year, boosting earnings, with the exception of Hungary and Croatia, where a “mild negative performance” is forecast. The bank owns the biggest lenders in Romania and the Czech Republic, and the second-largest in Hungary.
The bank “expects a slightly rising operating result in 2012, supported by selective loan growth in its core markets and further cost reductions,” it said in the statement. It didn’t give a forecast for net income, which will probably rise to 928 million euros this year, according to 12 analysts surveyed by Bloomberg.
Net interest income, the difference between interest charged on loans and paid on deposits and Erste’s main revenue source, grew 7 percent in the fourth quarter compared with a year earlier, driven by its domestic Austrian operation.
Bad debt charges, estimated by analysts to rise, fell 8 percent. Declining reserves in Austria and in the Czech and Slovak republics offset rising charges in Romania and Hungary. Delinquent loans increased to 8.5 percent of all lending in the quarter, mostly due to Hungary and Romania.
“The results seem to be better on almost every line of the earnings statement,” said Dirk Becker, an analyst at Kepler Capital Markets with a “buy” rating on Erste.
Erste expects those charges, the biggest drag on earnings since 2009, to decline by at least 20 percent to less than 1.8 billion euros this year. The charges rose to 2.27 billion euros in 2011, driven by an extra provision of 450 million euros in Hungary.
Banks in Hungary have suffered as Prime Minister Viktor Orban’s government forced them to swallow losses on mortgages denominated in euros and Swiss francs last year. Erste said its clients repaid 730 million euros of loans under the law, which has now expired, causing a total loss of 200 million euros that is covered by provisions.
It recouped 41 million euros of that loss thanks to a deal with the government under which banks can deduct part of the loss from the country’s bank tax. Treichl said that while he had no reason to assume that Hungary will turn profitable again before 2014, Erste had no plans to quit the country.
“We want to be the savings bank between Germany and Russia,” Treichl said. “Hungary is a very important country in this region. We’ve been in this region for 200 years and won’t leave a country just because of one government.”
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