Erste Group Bank AG (EBS) Chief Executive Officer Andreas Treichl told shareholders that Romanian lender Banca Comerciala Romana, his most expensive bet on growth in eastern Europe, will recover “very soon.”
“I’m convinced that Romania will be a cause of joy in the future,” Treichl said at Erste’s annual general meeting today, where he presented a 719 million-euro ($920 million) loss partly caused by the Black Sea country. BCR “was an expensive acquisition that was necessary for the development” of eastern Europe’s second-biggest lender after UniCredit SpA (UCG), Treichl said. “The recovery will come very soon.”
A writedown on BCR, for which Erste paid six times book value in 2006, was one of the reasons Erste reported its first loss last year since at least 1988. Bad debt charges in Hungary and losses on credit default swaps also contributed to the shortfall. Erste is asking shareholders at the AGM to do without a dividend for the first time since going public in 1997.
“I’m glad this year is over,” Treichl told about 1,900 shareholders at the meeting.
Erste said last month that bad loans in Hungary and Romania will remain a drag on profit for longer than it predicted earlier. Weak growth in those countries and the Czech Republic weighed on its shares today. They fell 6.8 percent to 14.405 euros at the 5:30 p.m. close in Vienna to the lowest level since Jan. 18, making it one of the worst performers of the 43-member Bloomberg Europe Banks and Financial Services Index, which declined 2.1 percent.
Treichl, 59, who over the past 15 years led an expansion that made Erste the biggest bank in the Czech and Slovak Republics before Romania, and the second-biggest in Hungary, said Poland was still the biggest hole on Erste’s map. The bank won’t be able to plug that gap soon, he told the meeting.
“We have to clean up our act in 2012, we’re fighting on many fronts,” Treichl said. “I do hope that the day will come when we can do something in Poland again.”
Erste’s small Ukrainian lender, which trails units of rival Raiffeisen Bank International AG (RBI), UniCredit and BNP Paribas SA, has piled up 192 million euros of losses since its acquisition in 2007, Treichl said, and the bank is currently reviewing how to deal with the business.
“It’s a grave situation and we’re discussing it,” Treichl said. The bank’s future is “very high up on our agenda because those aren’t losses that we’d like to see continuing.”
Erste won shareholders’ permission to sell so-called contingent convertible bonds, known as CoCos, that convert into equity should its capital ratio fall below 7 percent, among other scenarios, at the AGM.
As other hybrid capital forms are phased out by regulators, “there is the need to be able to issue new instruments” that are “especially designed for the new capital requirements,” Erste’s management board said in its recommendation to approve the measure. The bank doesn’t have concrete plans to sell such bonds, board member Franz Hochstrasser told shareholders.
Erste is filling a capital hole that emerged when rules were tightened to protect European lenders against the region’s debt crisis. The shortfall widened in October, when Treichl announced the losses in Hungary, Romania and on the CDSs.
Retained earnings and asset reductions brought Erste’s capital ratio to 9.7 percent as of March 31, exceeding the 9 percent minimum set by the European Banking Authority. The new bond authorization would amend the bank’s current allowance to sell bonds convertible into as many as 62.4 million shares.
Shareholders also approved an option for Erste to restructure its joint-liability agreement with Austrian savings banks, designed to avoid a capital reduction under the new rules imposed by the Basel Committee on Banking Supervision. The new rules, known as Basel III, will lower Erste’s capital by about 1.5 billion euros unless European lawmakers grant an exemption.
The amendment is engineered to avoid the capital reduction in case the bank doesn’t get an exemption in the law. They mean that Erste would no longer have to consolidate the savings banks’ risk-weighted assets, according to the AGM invitation. To achieve that it would give up some of its rights, including the appointment of managers, to a new entity jointly owned with the local lenders.
Erste’s biggest shareholder is a charitable foundation that’s headed by Treichl and owns 23.2 percent, according to data compiled by Bloomberg. Spain’s fourth-biggest bank CaixaBank (CABK) SA owns 9.7 percent. A group of Austrian savings banks owns 4.1 percent.
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