Business Review 2021
Key financial and operating data
CRR: Capital Requirements Regulation
Shares outstanding include Erste Group shares held by savings banks that are members of the Haftungsverbund (cross-guarantee system). The dividend for the financial year 2020 was paid in two tranches. On 19 May 2021, the annual general meeting resolved to pay a dividend of EUR 0.5 per share. An additional EUR 1 per share was reserved for a potential later payment. After expiry of the ECB recommendation, this dividend was paid in December 2021 as resolved by the extraordinary general meeting of 25 November 2021.
Strategy
Erste Group strives to be the leading retail and corporate bank in the eastern part of the European Union, including Austria. To achieve this goal, Erste Group aims to support its retail, corporate and public sector customers in realising their ambitions and ensuring financial health by offering excellent financial advice and solutions, lending responsibly and providing a safe harbour for deposits. Erste Group’s business activities will continue to contribute to economic growth and financial stability and thus to prosperity in its region.
In all of its core markets in the eastern part of the European Union, Erste Group pursues a balanced business model focused on providing the best banking services to each of its customers. In this respect, digital innovations are playing an increasingly important role. Sustainability of the business model is reflected in the bank’s ability to fund customer loans by customer deposits, with most customer deposits being stable retail deposits. Sustainability of the bank’s strategy is reflected in long-term client trust, which underpins strong market shares in almost all of Erste Group’s core markets. However, market leadership is not an end in itself. Market leadership creates value only when it goes hand in hand with positive economies of scale and contributes to the long-term success of the company.
The banking business, however, should not only be run profitably, but should also reflect its corporate responsibility towards all material stakeholders, in particular customers, employees, society and the environment. Therefore, Erste Group pursues the banking business in a socially responsible manner and aims to earn an adequate premium on the cost of capital.
Financial and operating performance
P&L 2021 compared with 2020; balance sheet as of 31 December 2021 compared with 31 December 2020
Net interest income increased to EUR 4,975.7 million (+4.2%; EUR 4,774.8 million), primarily due to rate hikes in the Czech Republic and in Hungary, strong volume growth in all markets and a positive one off effect resulting from TLTRO III take up in Austria and Slovakia. Net fee and commission income rose to EUR 2,303.7 million (+16.5%; EUR 1,976.8 million) supported by a strong economic recovery and rising equity markets. Increases were posted across all key fee and commission categories and core markets most notably Austria, with significant growth seen in particular in payment services and in asset management. Net trading result declined to EUR 58.6 million (EUR 137.6 million); the line item gains/losses from financial instruments measured at fair value through profit or loss rose to EUR 173.2 million (EUR 62.0 million). The development of these two line items was driven mostly by valuation effects, apart from a rise in income from the foreign exchange business in net trading result. Operating income increased to EUR 7,742.0 million (+8.2%; EUR 7,155.1 million). General administrative expenses were up at EUR 4,306.5 million (+2.0%; EUR 4,220.5 million), personnel expenses rose to EUR 2,578.1 million (+2.3%; EUR 2,520.7 million). Other administrative expenses increased to EUR 1,180.3 million (+1.9%; EUR 1,158.9 million). Payments into deposit insurance schemes included in other administrative expenses decreased to EUR 122.4 million (EUR 132.2 million). Depreciation and amortisation rose to EUR 548.0 (+1.3%; EUR 540.9 million). The operating result was up markedly at EUR 3,435.5 million (+17.1%; EUR 2,934.6 million) and the cost/income ratio improved significantly to 55.6% (59.0%).
Due to net allocations, the impairment result from financial instruments amounted to EUR 158.8 million or 9 basis points of average gross customers loans (EUR 1,294.8 million or 78 basis points). Net allocations to provisions for loans and advances as well as for commitments and guarantees given were posted in the Czech Republic, Romania, Croatia, Serbia and Hungary, but generally remained at a very low level. A positive contribution came from income from the recovery of loans already written off as well as from releases, most notably in Austria (in the Savings Banks segment). In the comparative period, updated risk parameters with forward looking information related to Covid 19 had resulted in high net allocations to provisions for loans and advances as well as for commitments and guarantees given. The NPL ratio based on gross customer loans improved to a historic low at 2.4% (2.7%). The NPL coverage ratio (excluding collateral) increased to 90.9% (88.6%).
Other operating result amounted to EUR 310.5 million (EUR 278.3 million). This deterioration was attributable to valuation effects and higher expenses for the annual contributions to resolution funds; the latter rose most strongly in Austria and Romania to EUR 108.6 million (EUR 93.5 million). Banking levies declined to EUR 73.5 million (EUR 117.7 million), primarily due to the abolition of banking tax in Slovakia and lower levies in Austria. At present, banking levies are payable in two core markets: in Hungary, banking tax amounted to EUR 15.0 million (EUR 14.5 million) and transaction tax to another EUR 48.0 million (EUR 44.0 million). In Austria, banking tax equalled EUR 10.5 million (EUR 25.5 million).
Taxes on income rose to EUR 525.2 million (EUR 342.5 million). The minority charge increased to a record EUR 484.8 million (EUR 242.3 million) due to significantly higher earnings contributions of the savings banks. The net result attributable to owners of the parent rose to EUR 1,923.4 million (EUR 783.1 million) on the back of the strong operating result and low risk costs.
Total equity not including AT1 instruments rose to EUR 21.3 billion (EUR 19.7 billion). After regulatory deductions and filtering in accordance with the CRR, common equity tier 1 capital (CET1, final) rose to EUR 18.8 billion (EUR 17.1 billion), as were total own funds (final) to EUR 24.8 billion (EUR 23.6 billion). Total risk riskweighted assets including credit, market and operational risk (CRR, final) increased moderately to EUR 129.6 billion (EUR 120.2 billion). The common equity tier 1 ratio (CET1, final) rose to 14.5% (14.2%), the total capital ratio declined to 19.1% (19.7%), primarily due to the early redemption of a portion of AT1 capital.
Total assets increased to EUR 307.4 billion (+10.8%; EUR 277.4 billion). On the asset side, cash and cash balances increased, primarily in Austria, to EUR 45.5 billion (EUR 35.8 billion), loans and advances to banks de-clined to EUR 21.0 billion (EUR 21.5 billion). Loans and advances to customers (net) rose to EUR 180.3 billion (+8.6%; EUR 166.1 billion). On the liability side, deposits from banks grew significantly to EUR 31.9 billion (EUR 24.8 billion) as a result of increased ECB refinancing (TLTRO III). Customer deposits rose in all core markets most strongly in Austria and the Czech Republic to EUR 210.5 billion (+10.2%; EUR 191.1 billion). The loan to deposit ratio declined to 85.6% (86.9%).
Segments
Erste Group’s segment reporting is based on IFRS 8 Operating Segments, which adopts the management approach. Accordingly, segment information is prepared on the basis of internal management reporting that is regularly reviewed by the chief operating decision maker to assess the performance of the segments and make decisions regarding the allocation of resources. Within Erste Group the function of the chief operating decision maker is exercised by the management board.
Erste Group uses a matrix organisational structure with geographical segmentation and business segments. Since the chief operating decision maker performs the steering primarily based on geographical segments, those are defined as operating segments according to IFRS 8. In order to provide more comprehensive information, the performance of the business segments is reported additionally.
Non-financial report
2021 was a recovery year with old and new challenges. Overall, the economic environment in Austria and CEE developed significantly better than originally forecast. Covid-19 vaccinations, lockdowns and other distancing measures have suppressed the spreading of the virus. While pandemic-induced restrictions were still delaying the recovery of the economy at the beginning of the year, growth forecasts were later raised despite challenges such as the disruptions of international supply chains or the Omicron variant.
The past year was also marked by an increased awareness and consensus that climate change and global warming must be addressed for ecological but also socio-economic reasons. A clear focus was on rethinking the economic growth model and allocating resources to greener, more resource efficient and resilient future economies.
Erste Group considers the transformation necessary and the right thing to do. In 2021, Erste Group joined the Net-Zero Banking alliance and announced its intention to reach climate neutral operations by 2023.
Erste Group further believes that a transition should be executed in a socially fair manner and great deal of attention needs to be paid not only to environmental but also social and governance objectives.
For Erste Group, considering the impact of its entrepreneurial activities on society or the environment is nothing new.
Corporate Governance
Erste Group Bank AG is a stock corporation established according to Austrian law and since 2003 has declared its commitment to complying with the rules of the Austrian Code of Corporate Governance (Austrian CCG – see www.corporate-governance.at) with the objective of ensuring responsible and transparent corporate governance. In addition, the management board adopted a Statement of Purpose in 2015. This statement reaffirms and states in more detail the purpose of Erste Group Bank AG to promote and secure prosperity throughout the region in which Erste Group is active. Building on this Statement of Purpose, a Code of Conduct defines binding rules for day-to-day business. Erste Group values responsibility, respect and sustainability in pursuing its business activities. The Code of Conduct therefore helps to protect the reputation of Erste Group and to strengthen stakeholder confidence.
The Corporate Governance Report has been prepared in accordance with sections 243c and 267b of the Austrian Commercial Code and Rules 60 et seq. of the Austrian CCG and combines the corporate governance report of Erste Group Bank AG, the parent, and the consolidated corporate governance report in one single report. The management board has also prepared a (consolidated) non-financial report in accordance with sections 243b and 267a of the Austrian Commercial Code for the financial year 2021, which is released as part of the annual report. Beginning with the 2020 financial year, information on the total remuneration of individual members of the management board or the supervisory board and on the principles governing the remuneration policy are no longer disclosed in this consolidated corporate governance report, but in a separate remuneration report pursuant to section 78e Austrian Stock Corporation Act.