To our Shareholders

2023 saw a slowdown in global economic growth. In our region of Central and Eastern Europe, economic activity was likewise impacted by subsiding, yet still elevated inflation and, along with it, a restrictive monetary policy environment. Household consumption was muted throughout the year. Exports were adversely affected by the weak growth of the main trading partners of the region, which took a toll on industry output. The decline in foreign demand was most pronounced in countries that are strongly dependent on the German economy such as the Czech Republic and Hungary. In Romania and Hungary, positive momentum came from agricultural production. Croatia benefited again from the excellent development of its tourism industry and recorded the best economic performance in the region. Overall, the 2023 GDP growth rates of CEE countries ranged between -0.9% in Hungary and 2.5% in Serbia.

Despite the weak economy, labour markets remained very robust, with Hungary and the Czech Republic reporting the lowest unemployment rates within the European Union. The Hungarian National Bank and the Czech National Bank started to cut interest rates in the last quarter of the year. In the eurozone, policy rates stood at 4.5% at year-end. While the Czech koruna depreciated against the euro, most CEE currencies were relatively stable throughout the year. On 1 January 2023, Croatia joined the euro zone as its 20th member, as a result of which three out of Erste Group’s seven core markets are now part of the eurozone.

What was the effect of these fundamentals on our result? In a nutshell: net interest income rose by more than 21% to EUR 7.2 billion driven by tailwinds that came, most importantly, from the rate cycle in the eurozone and customer loan growth in our CEE markets. At the same time, net fee and commission income reached a record high at EUR 2.6 billion. The 7.6% rise is all the more remarkable as the baseline had already been elevated due to strong growth in previous years. Growth was achieved in all core markets and across almost all product categories, with particularly strong performance in payment services and asset management. Overall, we posted EUR 10.6 billion in operating income, an increase by more than 23% year on year. As expected, operating expenses were likewise up, however, – by almost 10% – to EUR 5 billion. Inflationary pressure also had an impact on collective salary negotiations, with personnel expenses rising to nearly EUR 3 billion. Another block of costs – the regulatory costs typical of a bank (payments to resolution funds and deposit insurance systems as well as banking and transaction taxes) – amounted to some EUR 411 million. Overall, the strong operating result enabled us to achieve a cost/income ratio of 47.6% in 2023, which is excellent for our business model.

Asset quality remained very good in 2023. The NPL ratio rose only moderately from its historic low to 2.3% at the end of the year. Overall, (net) allocations to provisions amounted to EUR 128 million in 2023, which equals a provisioning ratio of 6 basis points of average gross customer loans. In addition to solid asset quality, another positive contribution came from the release of provisions for credit risks driven by updated forward looking economic indicators (FLIs) as well as stage overlays for cyclical industries and energy-intensive sectors.

Given the rise in interest rates and stricter regulations for mortgage loans in Austria, it is not surprising that in 2023 loan growth was registered mainly in the CEE core markets. In retail business, growth momentum was seen mainly in the Czech Republic and in Croatia. In 2023, lending to corporate customers did not show the same strong performance as in the previous year, mostly due to the fact that investment sentiment had been adversely affected by the macroeconomic environment. Overall, net loan growth therefore came in lower, with volume up 2.8% to EUR 233 billion.

Deposit inflow continued in 2023, with customer deposits growing by close to 4%. At a time of elevated inflationary pressure and increasing availability of higher-yielding alternative investment options, the stability of deposits from retail customers and SMEs is particularly remarkable. Because of its business model and solid market positions, Erste Group has a large proportion of granular retail customer deposits. At year-end 2023, this group of customers again accounted for more than two-thirds of all customer deposits. The changed interest rate environment resulted in a partial shift from demand deposits to term deposits. At the end of December 2023, the loan-to-deposit ratio stood at 89.3%. Similarly encouraging were funding activities in the capital markets. Not only the parent company, but also a number of local subsidiaries in CEE countries successfully issued benchmark bonds in a variety of asset classes and placed these issues both locally and internationally.

As this topic is very important to me, a few words on the focal theme of digitalisation: George plays an important role in promoting digital growth and the digital transformation. The number of digital users of our digital platform George and digital transactions have been rising continuously. Across Erste Group, nearly 10 million customers were using George at year-end 2023. By now, almost half of all retail business products are distributed digitally. The roll-out of George Business, our solution for corporate customers, has been continued. In upgrading IT, the focus will remain on the automation of transactions and processes and digital data analysis.

Erste Group’s strong capitalisation is another point that I wish to highlight once again. In addition to sustainable profitability, a strong capital base is essential as it is the precondition for growth and the Bank’s ability to pay dividends and secure and/or expand the range of activities it is able to pursue. At 15.7% as of the end of December 2023, the common equity tier 1 ratio (final) was substantially above the regulatory minimum requirement and our target of 14%. For the 2023 fiscal year, the management board will propose a dividend of EUR 2.70 per share at the annual general meeting. In addition, after the successful completion of a share buyback programme with a volume of EUR 300 million in February 2024, Erste Group is seeking to launch another such programme with a volume of EUR 500 million (subject to regulatory approval).

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. We report on our strategy, goals, achievements, opportunities and risks in the field of sustainability annually in conformity with the GRI Standards 2021 and comply with the recommendations of the Task Force on Climate Related Financial Disclosures (TCFD). At this point, I should like to name at least two environment-related ESG goals: we are working to achieve net-zero operations by 2030. Achieving a net-zero portfolio will take a little more time, until 2050.

Further information on Erste Group’s targets and emission reduction pathways as well as numerous sustainability initiatives and a wide range of ESG performance indicators are provided in our non-financial report.

In the current fiscal year of 2024, we expect loan growth of about 5% on the back of a moderate acceleration of economic growth. Combined with negative impacts (depending on the extent and timing of central bank rate cuts), we expect for 2024 a moderate decline of net interest income, by about 3%, after two years of enormous growth. Net fee and commission income is projected to continue its positive trend and increase by about 5%. Assuming a rise in operating expenses by about 5%, we believe that we will be able to achieve a cost/income ratio of around 50%. In a largely stable environment, we do not expect risk costs to exceed 25 basis points in 2024. In aggregate, this should yield a continued solid return on tangible equity (ROTE) of approximately 15%.

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 up prosperity. As a leading banking group, we continuously develop 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. You may trust that my designated successor, Peter Bosek, who will take over the helm at the Bank in July, will be working with the well-trained and committed employees of Erste Group to keep driving the customer business forward in our core markets while also pushing ahead with digitalisation and innovation. It is of special importance to me to thank the employees of Erste Group once again for their personal commitment. Our joint efforts have helped us to further strengthen Erste Group’s position in the CEE region. The employee share programme offers the opportunity to participate in the future success of Erste Group like all of our shareholders.