Letter from the CEO
@ Daniela Beranek
Dear shareholders,
On 1 July, I assumed responsibility for Erste Group as CEO with a sense of joy and momentum. It is a privilege to lead a bank with a tried-and-tested business model and a proven strategic positioning. Erste Group focuses on the financial needs and concerns of its retail and corporate customers, the provision of value-adding products and services and the delivery of adequate advisory services through traditional branch offices and, increasingly, digital channels. We believe in the people, in the businesses and in our region of Central and Eastern Europe. Since Erste Group’s foundation more than 200 years ago, it has been our stated goal to help our customers achieve financial independence and build prosperity – regardless of status, nationality, faith, gender or age. As a leading banking group, we keep developing our offerings in line with our mission: from socially and ecologically responsible financial services to financial health and security. I am convinced of Erste Group’s potential, its capacity for innovation and its resilience in the face of challenges of all kinds. Our readiness to engage in transformation and growth, our rigorous focus on the digital transition and the pursuit of the manifold facets of financial health make us fit for the future. For 2022, Erste Group posted a very gratifying result – a net profit of EUR 2,164.7 million based on an excellent operating result and lower risk costs – and achieved all of the targets it had set itself. Erste Group’s capital as well as liquidity and funding positions remain strong. At year-end, the common equity tier 1 ratio amounted to 14.2%.
The economic environment changed fundamentally in the course of the year. Early in the year, our region showed signs of a solid recovery after the restrictions of the Covid-19 pandemic. Then, the war in Ukraine, the knock-on effects of the sanctions, uncertainty surrounding gas supplies from Russia and turmoil in the energy markets as well as continued international supply chain disruptions slowed the rebound of the economy. Governments implemented once again support programmes, this time to cushion the impact of soaring energy prices. The rise in inflation had an adverse impact on consumer spending and investment activity. In the first half of the year, the economy did better than originally expected, though, and so the 2022 growth forecasts for our core markets were nonetheless raised several times. Labour market stability was remarkable, with unemployment rates at historically low levels across all core markets. While the central banks of the Czech Republic, Hungary and Romania had reacted to accelerating inflation pressure by raising interest rates as early as 2021, the ECB implemented its first rate hike in a decade only in July. After the fifth rate hike of 16 March 2023, the euro zone’s policy rate now stands at 3.5%.
How did this macroeconomic environment impact the performance of Erste Group? In a nutshell: both of our two key income components performed solidly. Net interest income rose almost 20% to EUR 5.95 billion on the back of robust loan growth in all core markets and rate hikes that, driven by inflation, came in higher than originally expected in both the CEE core markets and the eurozone. At the same time, net fee and commission income hit an all-time high at EUR 2.45 billion. The 6.5% rise is all the more remarkable as the baseline had already been elevated after years of dynamic growth. Especially payment services and asset management were very strong despite a clouded economic outlook and capital market volatility. Overall, Erste Group posted EUR 8.57 billion in operating income, up more than 10% year on year. At the same time, we maintained the cost discipline that we had already practiced for many years. In this context, I consider it particularly important to mention that we have not made any cuts to our digitalisation efforts whatsoever. Another set of costs that has been carefully monitored – regulatory costs typical of banks (payments to resolution funds and deposit insurance systems as well as banking and transaction taxes) – stood at around EUR 470 million. Overall, costs rose at a slower pace than income, by 6.2% to EUR 4.57 billion, despite the inflationary environment. The resulting cost/income ratio of 53.4% has enabled us to set an even more ambitious target of 52% for 2024.
Asset quality improved once again in 2022. At year-end, Erste Group’s NPL ratio was 2.0%, the best level since its 1997 IPO. While risk costs were up they remained, overall, low. Provisions for credit risks were mainly driven by updated forward looking economic indicators (FLIs) as well as stage overlays for cyclical industries and energy-intensive sectors. Overall, (net) provisions were set aside in the amount of approx. EUR 300 million in 2022, which is the equivalent of a provisioning ratio of 15 basis points of average gross customer loans.
Despite rate hikes and slower growth in the second half of the year, Erste Group saw extraordinary loan growth, with net loans up 12.1%. In the 2022 fiscal year, growth was particularly vigorous in the corporate segment, fuelled by brisk demand for working capital loans. In the retail segment, demand for housing loans declined visibly in the second half of the year, particularly in Austria and the Czech Republic, due partly to higher interest rates and partly to stricter regulatory standards.
One of Erste Group’s traditional strengths – a well diversified deposit base in all core markets – should not go unmentioned. The inflow of deposits remained strong in 2022, with customer deposits increasing by 6.4%. Because of its business model and solid market positions, Erste Group has a large proportion of granular retail customer deposits, which at year-end 2022 accounted for nearly 70% of all customer deposits. The loan-to-deposit ratio stood at 90.2%.
The expansion of our digital platform George was continued. The number of digital users and digital transactions increased continuously. Across the Group, nearly nine million clients were using George by year-end 2022. In the second half of 2022, products sold through digital channels already accounted for more than one third. Roll-out of George Business, our solution for corporate clients, was started in Austria. Additional areas of priority in IT modernisation have been the automation of transactions and processes and digital data analysis.
I would particularly like to highlight the strong capitalisation of Erste Group: in addition to sustainable profitability, a strong capital base is important as it is the precondition for the bank’s ability to grow and pay dividends. At 14.2% at the end of December 2022, the common equity tier 1 ratio (final) was again excellent and substantially above our 13.5% target as well as far above the regulatory minimum requirement.
For the 2022 fiscal year, the management board will propose at the annual general meeting to pay a dividend of EUR 1.9 per share. In addition, Erste Group has applied for regulatory approval of a share buyback with a volume of up to EUR 300 million in 2023.
Where sustainability is concerned, our strategic priorities are based on the conviction that the green transition and social inclusion are crucial to the long-term prosperity of our region.
Here, I should like to name a few of our ESG targets or significant milestones: as member of the Net Zero Banking Alliance we are planning for Erste Group’s operations to achieve climate neutrality by year-and 2023 and net-zero emissions by 2030. Achieving a net-zero portfolio will take some more time, until 2050. Additional targets have been defined for social banking and the diversity of our staff.
Further information on Erste Group’s targets and numerous sustainability initiatives as well as a wide range of ESG performance indicators are provided in the non-financial report, which again forms part of the Annual Report for fiscal year 2022. Going forward, we will brief you in even more depth on the ecological, social and governance themes that are of relevance to us.
At this point, I should like to highlight a few key components of our outlook for 2023. In the current fiscal year, we expect loan growth to slow to about 5%. Combined with higher interest rates in the eurozone, this should result in net interest income growth of about 10%. Net fee and commission income is expected to rise by about 5%. Even with inflation running higher, operating expenses should increase in 2023 again less strongly than operating income by about 7 to 8%. The cost/income ratio target set for 2024 is more ambitious at around 52%. In view of strong employment, we do not expect risk costs to exceed 35 basis points in 2023. This should, finally, yield a continued solid return on tangible equity (ROTE) of 13 to 15%.
It is of special importance to me to thank the employees of Erste Group for their personal commitment. Our joint efforts and our conviction have helped us to further strengthen Erste Group’s position in the CEE region. I would be pleased if, this year again, a large number of Erste Group employees took advantage of the employee share ownership programme, which enables them to participate in the future success of Erste Group like all of our shareholders.
Willi Cernko mp
Management
Management Board
Maurizio Poletto, Chief Platform Officer
David O‘Mahony, COO
Alexandra Habeler-Drabek, CRO
Stefan Dörfler, CFO
Willi Cernko, Vorsitzender des Vorstandes
Ingo Bleier, Mitglied des Vorstandes für Corporate Banking & Markets
(from left to right)
Supervisory Board
Friedrich Rödler, Chairman of the Supervisory Board
Maximilian Hardegg, 1st Vice Chairman of the Supervisory Board
Elisabeth Krainer Senger-Weiss, 2nd Vice Chairwoman of the Supervisory Board
Members of the Supervisory Board:
Christine Catasta, Henrietta Egerth-Stadlhuber, Hikmet Ersek, Alois Flatz, Marion Khüny, Mariana Kühnel, Friedrich Santner, Michael Schuster, András Simor, Michèle F. Sutter-Rüdisser
Delegated by the employees’ council:
Barbara Pichler, Martin Grießer, Andreas Lachs, Jozef Pinter, Karin Zeisel, Markus Haag, Regina Haberhauer
Erste Group on the capital markets
After two years that had been overshadowed by the coronavirus pandemic, 2022 was marked by Russia’s invasion of Ukraine and the ensuing far-reaching consequences for the global economy. The significant rise in commodity prices combined with existing supply shortages in raw materials and intermediate products pushed inflation rates to historic highs such as 9.1% in the US in June and 10.6% in the eurozone in October 2022. The central banks responded to this environment by carrying out multiple significant rate hikes. Against the backdrop of continued high inflation, further tightening by the central banks, existing supply shortages and the energy crisis in Europe, the outlook for global economic growth clouded in the course of the year. While in the US the downturn was driven primarily by central bank intervention, the eurozone economy was facing additional pressure from the strong rise in energy prices and reduced natural gas supply. This was also reflected in the weakness of the euro, which temporarily fell below parity against the US dollar for the first time since 2002. Geopolitical uncertainty, elevated rates of inflation, the central banks’ rate hikes and the slowdown of the global economy caused growing uncertainty among investors and led to repeated setbacks in the capital markets.
A challenging year
After the strong performance of the previous year, the Russia-Ukraine war, uncertainty over energy supplies and changes in inflation and interest rates had an adverse impact on equity markets. Rising yields in the developed markets, high energy costs and inflation as well as expectations of an economic downturn clouded the outlook of a large number of companies and resulted in a continuous weakening of consensus estimates of revenues and earnings. Despite a slight easing of inflation rates, economic indicators and energy prices in the final quarter, the indices covered declined in most cases by double digits. In the US, the Dow Jones Industrial Average Index closed the reporting period at 33,147.25 points, down 8.8% year-on-year. The broader Standard & Poor’s 500 Index declined by 19.4% to 3,839.50 points in the year ended, the Nasdaq technology index even by 33.1% to 10,466.48 points. In Europe, the Euro Stoxx 600 Index decreased by 12.9% year-on-year, ending the year 2022 at 424.89 points. The Austrian Traded Index (ATX) declined by 19.0%.
Central banks start turnaround in interest rates
Central banks have to cope with the trade-off – intensified by the ongoing geopolitical crisis – between fighting inflation and working to stabilise the economy, financial and public debt. To bring down persistently high inflation rates, the central banks issued clear signals and ended their previously expansionary monetary policies, tolerating in the process even adverse impacts on the economy. After rates had been raised in a number of CEE countries and in the United Kingdom, the US Federal Reserve (Fed) likewise started its rate-hike cycle in mid-March. Overall, the Fed raised its rates seven times in the course of the year. As of year-end, the interest rate is in the range of 4.25% to 4.50%. With some time lag, the European Central Bank (ECB) likewise ended its zero-interest-rate policy after more than six years in July by embarking on its first rate hike in 11 years. Overall, the ECB raised its benchmark rate four times to 2.5% at year-end. Both central banks said they would continue their rate-hike cycles to contain the high rates of inflation.
Economy growth slowing
The International Monetary Fund (IMF) has adjusted its global growth outlook. Global economic growth is expected to come in at 3.4% for 2022 and at 2.9% in 2023, with the forecast for the eurozone being 3.5% for 2022 and 0.7% for 2023.
Banking shares affected by inflation and economic outlook
In the given environment, bank shares also suffered – partly substantial – setbacks. Despite higher net interest income driven by rising interest rates, bank shares came under pressure because of concerns over a decline in loan demand and a potential rise in defaults. The Dow Jones Euro Stoxx Banks Index, which is composed of the leading European bank shares, declined by 4.6% to 95.86 points during the reporting period.
Vienna stock market down
The Austrian stock market was hit harder than other markets due to its close relations with Eastern Europe. After posting gains of around 39% in the previous year, the ATX declined by 19.0% in 2022 in a market slide that was sharper than in 2020, the first year affected by the coronavirus (-12.8%). At year-end, the index stood at 3,126.39 points.
Challenging environment weighing on share price
After posting its second-highest gain last year since going public in 1997, the Erste Group share saw a strong start to the year, but then suffered significant losses in the wake of geopolitical events. Strong operating performance, solid asset quality and risk cost forecasts were not acknowledged by the market. The key themes were macroeconomic developments (specifically GDP growth, inflation and labour market data) and their impact on income components as well as the introduction of windfall profit taxes. It was only in the final quarter of the reporting period, after the release of better-than-expected results, including in particular net interest income, that the share recovered some of the ground previously lost. Despite such growth, the Erste Group share was down disproportionately versus the European banking index and, at its year-end closing price of EUR 29.90, was 27.7% lower than at year-end 2021. It marked its low at EUR 21.66 on 26 August and its high at EUR 44.98 on 9 February.
25th anniversary of Erste Group’s IPO
25 years ago, on 4 December 1997, Erste Group went public in an IPO with a volume corresponding to EUR 510 million, at the time the largest-ever share issue in Austrian stock market history. The IPO laid the foundation for Erste Group’s growth in Central and Eastern Europe. The funds raised also helped fund investments into technology and digital innovation. Together with later supplemental public offerings, the stock market listing played a key role in Erste’s growth from a regional savings bank in Austria to being a leading financial services provider in Central and Eastern Europe servicing some 16 million customers in seven core markets.
Employee Share Programme
In the year ended, Erste Group started offering its employees the new employee share programme. By joining this programme, employees participate not only directly in the success of Erste Group, but also become co-owners of their company. In 2022, approximately 30,000 employees took part in this programme. This also strengthened Erste Mitarbeiterbeteiligung Privatstiftung (Erste Employee Foundation), in which the voting rights of the shares acquired under the employee share programme are combined and exercised in a uniform manner.
Number of shares, market capitalisation and trading volume
In the year ended, the number of shares of Erste Group Bank AG remained unchanged at 429,800,000. At year-end 2022, Erste Group’s market capitalisation stood at EUR 12.9 billion, 27.7% down on year-end 2021 (EUR 17.8 billion).
The Erste Group share is listed on the stock exchanges of Vienna, Prague and Bucharest. Its main stock exchange is Vienna, where in the year ended its trading volume averaged 820,277 shares per day.
Sustainability indices and ratings
The Erste Group share has been part of VÖNIX, the Vienna Stock Exchange’s sustainability index, since its launch in 2008. Since 2011, the Erste Group share has been included in the STOXX Global ESG Leaders Index, which represents the best sustainable companies world-wide on the basis of the STOXX Global 1800. Since 2016, the Erste Group share has been included in the FTSE4Good Index Series, since 2017 in the Euronext Vigeo Europe 120 Index. In addition, Erste Group has held prime status in the ISS ESG corporate ratings since 2018. MSCI has rated Erste Group with AA. Since February 2021, Sustainalytics has assessed Erste Group to be at low risk of experiencing material financial impacts from ESG factors. In 2022, Erste Group participated in the CDP (Carbon Disclosure Project) Rating; its sustainability measures were assessed with B.
Erste Group’s dividend policy is guided by the Bank’s profitability, growth outlook and capital requirements. We target a payout ratio in the range of 40-50%, based on reported net profit, net of AT1 coupons.
The 29th annual general meeting that took place on 18 May 2022 was again held virtually. The annual general meeting agreed to distribute a dividend of EUR 1.60 per share for the fiscal year 2021, which was paid out on 25 May 2022.
The ratings of Erste Group remained unchanged in 2022 despite geopolitical uncertainty. Standard & Poor’s left its rating at A+/A-1, Moody’s at A2/P-1 and Fitch at A/F1, all with a stable outlook.
2022 was characterised by innovations of Erste Group's capital market activities. With the dual issuance of a 6.5-year and a 15-year covered bond (EUR 750 million each) at the beginning of 2022, Erste Group opened up the European capital market for issuers from the financial sector. The two tranches were issued at extremely attractive terms at -3bps + midswap for the shorter tenor and +5bps for the longer one. At the end of the first quarter of 2022, a EUR 500 million Senior Preferred Benchmark with a 4-year tenor was issued. The fourfold oversubscription of the order book (priced at MS+55bps) confirmed our decision for a shorter tenor compared to previous transactions in a difficult market environment.
The market environment remained volatile. At the end of May 2022, however, at by and large stable conditions, we issued a EUR 500 million Tier2 bond (MS+255bps), which also generated high demand (order book over EUR 1.8 billion). The last benchmark bond followed in September, when we returned to the covered bond market with a EUR 750 million covered bond. The 8-year tenor served the untapped mid-tenor band and was issued at MS+16bps.
Open and regular communication with investors and analysts
As Covid-induced restrictions were gradually lifted in the course of the year, banking and investor conferences were no longer held only virtually as phone or video conferences events but, starting from the second quarter, increasingly with in-person attendance. A large part of banking and investor conferences organised by Autonomous, Bank of America, BNP Paribas Exane, JP Morgan, Kepler Cheuvreux, Barclays, Morgan Stanley, PKO, Société Générale, Concorde, Pekao, HSBC, Deutsche Bank, mBank and Wood were held as in-person events. This also applied to the road show conducted with investors in Europe and North America in late May after the release of first-quarter results and the autumn road show held after the release of the third-quarter results in November, likewise in Europe and North America. The management and the investor relations team met with investors in a total of 250 one-on-one and group meetings, in which Erste Group’s strategy was presented against the backdrop of the current environment and questions raised by investors and analysts were answered. 48 meetings were held to intensify the dialogue with bond investors. A large number of face-to-face meetings with analysts and portfolio managers were held at conferences, virtual road shows and investors’ days hosted by the European Covered Bond Council (ECBC), Barclays, Bank of America, Citigroup, Danske Bank, Goldman Sachs, Morgan Stanley, ING and UBS. The website http://www.erstegroup.com/ir provides comprehensive information on Erste Group and the Erste Group share. Investors and the broader public can follow the investor relations team on the social media platform Twitter at http://twitter.com/ErsteGroupIR. These sites provide users with the latest news on Erste Group on the social web. More details on the social media channels, the news/reports subscription and reminder service are available at https://www.erstegroup.com/en/investors/ir-service.
Analyst recommendations
In 2022, 22 analysts regularly released research reports about Erste Group. The Erste Group Bank AG share was covered by financial analysts at the following national and international firms: Autonomous, Bank of America, Barclays, BNP Paribas Exane, Carraighill, Citigroup, Concorde, Deutsche Bank, HSBC, JP Morgan, JT Banka, KBW, Kepler Cheuvreux, mBank, Mediobanca, Morgan Stanley, PKO, Pekao, RBI, Société Générale, UBS and Wood. As of the end of the year, 17 analysts had issued buy recommendations, four had rated the Erste Group share as neutral and one as underperform. The average year-end target price stood at EUR 40.00. The latest updates on analysts’ estimates for the Erste Group share are posted at https://www. erstegroup.com/en/investors/share/analyst-estimates.
25th anniversary of Erste’s IPO
“Erste’s IPO 25 years ago laid the foundation for a success story. Erste took the right step and raised capital through the stock exchange for major acquisitions in the 2000’s. Thanks to this expansion, Erste Group has advanced to become the leading banking group in the eastern part of the EU”
Willi Cernko, CEO Erste Group Bank AG
Austria Stock Talk Vienna Stock Exchange
Stefan Dörfler, CFO Erste Group Bank AG
* A comparison after the IPO would not be applicable as Erste Group has been included in this index only since 16 January 1998.
IPO … initial public offering, SPO … secondary public offering
1 Erste Employee Foundation, syndicated savings banks foundations, own holdings of savings banks
2 Unidentified institutional and retail investors
3 Incl. market makers, prime brokerage, proprietary trading, collateral and stock lending positions which are visible through custodian banks.
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