Erste Group takes balance sheet measures as sovereign debt crisis continues to weigh on European banks
Erste Group reduced its sovereign exposure with asset disposals and will refocus its Hungarian operations in light of "unprecedented" government intervention in the banking market and deteriorating asset quality.
With a resolution to the sovereign debt crisis appear more of a remote aspect, Austrian bank Erste Group, which has a strong presence in the CEE region, announced that is has taken "radical action" to prepare for a period of prolonged uncertainty. Andreas Treichl, CEO of Erste Group Bank AG, said the bank had taken measures which would see a profit of approximately EUR 700 million for the first three quarters of 2011 turned into a loss.
In a statement released on the 10 October, Triechl said all of these measures were exclusively one-off charges which will prepare the bank for the situation ahead. "Our core tier 1 ratio and our strong liquidity situation, which are key indicators of our strength in these times, will not be affected," he stated. "Supported by a continuous strong operating performance our core tier 1 ratio at the end of this year will remain unchanged versus the end of 2010."
The measures taken by Erste Group include reducing its sovereign exposure to Greece, Portugal, Spain, Ireland and Italy from EUR 1.9 billion at year-end 2010 to EUR 0.6 billion at 30 September 2011 via asset disposals. The majority of this exposure is marked to market. The bank stated that the combined sovereign exposure to Greece and Portugal declined to about EUR 10 million. In addition, Erste Group changed the presentation of its CDS portfolio (protection sold) from amortised cost to market values, leading to a one-off cumulative charge against shareholders’ equity of EUR 280 million for the years prior to 2011.
The impact on the 1-9 2011 income statement (profit and loss account) amounts to about EUR 180 million (post-tax). In the Hungarian market it said it would take a write down to its entire Hungary-related goodwill to the tune of EUR 312 million pre-tax (EUR 312 million post-tax). The bank will also take charges for additional risk provisions totalling EUR 450 million pre-tax (EUR 450 million post-tax), which it attributed to unprecedented government intervention in the Hungarian banking market, an increase in the target NPL coverage ratio and a deterioration in asset quality.
The bank pinpointed the Hungarian government's imposition of a banking tax and a "forced FX loan conversion scheme. Erste Group will recapitalise Erste Bank Hungary by injecting up to EUR 600 million of new equity into the bank. Erste said looking ahead, its Hungarian operations would focus on lending in local currency funded from "locally-sourced liquidity" and that it would focus on enhancing its client service capabilities in its existing branch network.
Erste Group will also partially write down its Romania-related goodwill by EUR 700 million pre-tax (EUR 627 million post-tax) to reflect the slower than expected economic recovery. As a result of these measures, Triechl said the bank would report a net loss of approximately EUR 920-970 million in the first nine months of 2011. Adjusted for extraordinary charges (excluding the banking taxes in Austria and Hungary) Erste Group expects to post a net profit of approximately EUR 700 million for the first nine months of this year. Due to the continued strong underlying operating profitability, it expects its core tier 1 ratio (total risk) at year-end 2010 of 9.2% to remain unchanged at year-end 2011.
The deteroriating eurozone outlook will also see the bank postpone early repayment of the state portion of the participation capital (EUR 1.2 billion) by at least a year.
Following on from Erste Group's announcement, Raiffeisen Bank International (RBI), another Austrian banking group active in the CEE region, said its exposure to the sovereign debt of peripheral eurozone countries was limited. At the end of June 2011, RBI had no sovereign exposure to Greece and Ireland, a sovereign exposure of less than EUR 10 million to Spain and Portugal, as well as a sovereign exposure of EUR 474 million to Italy. It said goodwill (amounting to only EUR 3.5 million) at its Hungarian operations would be written off this year.
RBI also expects a need for provisioning of around EUR 100 million due to the new legislation decided by the Hungarian Parliament and additional significant provisioning because of the difficult market environment in Hungary. It said it would disclose more details on 24 November when it published its third quarter results.