Letter from the CEO
Dear shareholders,
The 2023 fiscal year was again a very successful one for Erste Group. With a net profit of EUR 2,998 million, we posted an excellent result. Dynamic growth of our key income components – net interest income and net fee and commission income – more than offset the inflation-induced rise in costs and resulted in a significant improvement in the cost/income ratio. Major contributions to this development came from the growth in customer loans – up a notable 3.7% in the retail business and 5.6% in the corporate business – as well as from the normalisation of the interest rate environment: after years of negative interest rates, the ECB finally raised its rates to combat inflation. Continued solid asset quality and low risk costs also contributed to Erste Group’s profitability. This resulted in a further strong improvement in capitalisation: at year-end, the common equity tier 1 ratio stood at 15.7%. Overall, we significantly exceeded almost all financial goals we had set ourselves at the beginning of 2023.
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.
Willi Cernko mp
Management
Management Board
Maurizio Poletto, Chief Platform Officer
Ingo Bleier, Mitglied des Vorstandes für Corporate Banking & Markets
Willi Cernko, Vorsitzender des Vorstandes
Stefan Dörfler, CFO
Alexandra Habeler-Drabek, CRO
David O‘Mahony, COO
(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, Alois Flatz, Marion Khüny, Mariana Kühnel, Friedrich Santner, Michael Schuster, András Simor, Michèle F. Sutter-Rüdisser, Christiane Tusek
Delegated by the employees’ council:
Barbara Pichler, Martin Grießer, Andreas Lachs, Karin Zeisel, Markus Haag, Regina Haberhauer
Erste Group on the capital markets
International equity markets closed the year 2023 with significant gains. The previous year had seen high inflation rates driven by rising price levels and supply bottlenecks in commodities as well as continued rate hikes by central banks. In 2023, the financial markets were again affected by geopolitical events, interest rate policies, inflation and economic development. The major central banks (US Federal Reserve, Fed, and the European Central Bank, ECB) continued their rate hikes well into the third quarter. Slowly but steadily subsiding inflation rates and expectations of moderate global growth had a positive impact on equity markets while geopolitical conflicts (most notably the war in Ukraine and the conflict in the Middle East) and soaring government bond yields in the US and in Europe had an adverse effect. Expectations that a recession would not materialise and declining inflation rates raised hopes for an imminent end to the central banks’ rate hike cycles, triggering a year-end rally in the
equity markets that pushed a number of indices to new highs.
Equity markets solidly up
After the setbacks in the previous year, the equity marketscovered posted double-digit gains, with just a few exceptions. Indices rose significantly, most notably in the fourth quarter, as the rate-hike cycle had peaked, rate cuts were being anticipated in the near future and companies released solid revenues and earnings forecasts for 2024. In the US, the Dow Jones Industrial Average Index was boosted by the year-end rally, hitting a new all-time high and ending the reporting period at 37,689.54 points, up 13.7% versus year-end 2022. The broader Standard & Poor’s 500 Index advanced 24.2% to 4,769.83 points year-on-year. In Europe, the Euro Stoxx 600 Index increased by 12.7% in the course of 2023, closing the year at 479.02 points. The German DAX equity market index likewise marked an all-time high at year-end, having risen by 20.3% to 16,751.64 points. Over the past year, it was primarily technology shares that recorded significant gains. The US technology index Nasdaq was up 43.4% to 15,011.35. In Asia, the picture was mixed. While the Japanese Nikkei Index advanced by approximately 28%, the Chinese Shanghai Shenzen CSI300 Index declined by about 11%.
Tight monetary policies expected to end
In response to inflationary pressure, the central banks had phased out their zero-rate policies already before 2023 and taken resolute action to contain historically strong increases of price levels, which were fuelled primarily by the high cost of energy and food. Leading central banks kept hiking their rates well into the third quarter of the 2023 reporting year. In its last rate hike to date in late July, the eleventh within 16 months, the US Fed set the range for its effective policy rate at 5.25% to 5.50% and has since left it unchanged. The ECB raised its policy rate in a total of ten rate hikes – the final one in September – to 4.50%. As inflationary pressure subsided, the Fed signalled an end to its rate hike cycle and hinted at first rate cuts in 2024. The ECB will wait and see how inflation is going to develop before announcing any future moves.
Global economy growing moderately
The global economy proved more resilient than expected in the first half of 2023, but slowed down later in the year amid tighter funding conditions, lacklustre trade growth and lower business and consumer confidence. Risks to short-term forecasts include increased geopolitical tensions and stronger-than-expected impacts of monetary tightening. Global growth furthermore still depends heavily on the development of Asian economies (most importantly China). The International Monetary Fund (IMF) has forecast worldwide economic growth of 3.1% in 2023 and in 2024. With inflation continuing to subside and real incomes going up, the IMF expects global growth of 3.2% in 2025. For the eurozone countries, the IMF projected a growth rate of 0.5% for 2023 (2024: 0.9%, 2025: 1.7%); for the US, growth of 2.5% for 2023 (2024: 2.1%, 2025: 1.7%). The German economy, whose performance continues to be a major factor for the economies of Central and Eastern Europe, slightly contracted in 2023, and is expected to grow by 0.5% in 2024 and 1.6% in 2025.
2023 was a good year for bank shares
After the losses sustained in the markets in the previous year, banks were among the preferred industries in 2023. Despite a slowing economy and tighter financing conditions, banks benefited from higher interest rates. Rising rates supported the deposit and lending business, leading to wider margins and improved profitability. Uncertainty in the banking sector stemming from the insolvencies of three US credit institutions and turmoil surrounding Credit Suisse in the first quarter of 2023 were only short-lived due to quick intervention by the supervisory authorities. In the year ended, the Dow Jones Euro Stoxx Bank Index, which is composed of the leading European bank shares, rose by 23.5% to 118.38 points.
Vienna Stock Exchange lagging behind global equity markets
After the Austrian equity market had lost around 19% in the previous year, the Austrian Traded Index (ATX) gained 9.9% in the course of 2023 and ended the trading year at 3,434.97 points, thus underperforming international indices. Geopolitical Erste Group on the capital markets tensions, most notably the ongoing war in Ukraine, led to more caution among international investors and hence a more subdued development of share prices.
Double-digit gains
After the setbacks suffered in the previous year, the Erste Group share posted significant gains in the year ended and closed the reporting period at EUR 36.73, up 22.8%. The Erste Group share marked its 2023 high at EUR 37.23 on 4 December and its low at EUR 28.19 on 24 March. The key factors driving the share price were a positive view of the industry, results beating analysts’ expectations as well as an upward revision of targets for the year 2023. The focus of market participants was also on forecasts for 2024, including the return on tangible equity (ROTE),
future banking taxes and, last but not least, expectations about capital distributions.
Employee share programme
After the successful implementation of the employee share programme in the previous year, Erste Group employees again had the opportunity to buy Erste Group shares under the employee share programme in 2023. In 2023, approximately 35,000 employees participated in this programme (previous year: 30,000). The successful continuation of the programme resulted in a further strengthening of 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.
Share buyback programme
On 12 May 2023, the annual general meeting of Erste Group decided on a share buyback programme with a volume of up to EUR 300 million. After the ECB had given its approval in early August, the buyback of own shares started on 16 August 2023 and was completed on 16 February 2024. A total of 8,887,092 own shares were repurchased. The cancellation of the repurchased own shares in the companies register took effect on 24 February 2024. The number of own shares decreased accordingly. 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 2023, Erste Group’s market capitalisation stood at EUR 15.8 billion, up 22.5% on year-end 2022 (EUR 12.9 billion). In February 2024, the number of shares following the completed share buyback programme changed to 420,912,908.
Erste Group 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 1,169,113 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 2005. Since 2011, the Erste Group share has been included in the STOXX Global ESG Leaders Index, which represents the best sustainable companies worldwide 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 Index (since 2023: Moody’s Analytics) Eurozone 120. In addition, Erste Group has held prime status in the ISS ESG corporate ratings since 2018. MSCI has rated Erste Group with AA. Sustainalytics has assessed Erste Group to be at low risk of experiencing material financial impacts from ESG factors. In 2023, Erste Group participated in the CDP (Carbon Disclosure Project) rating for the second time; its sustainability measures were affirmed at B.
Dividend
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 30th annual general meeting that took place on 12 May 2023 was held with in-person attendance. The annual general meeting resolved to distribute a dividend of EUR 1.90 per share for the 2022 fiscal year, which was paid out on 19 May 2023. For the 2023 fiscal year, the management is planning a dividend of EUR 2.70 per share.
Moody’s upgraded Erste Group’s rating to A1/P-1 in 2023, confirming a stable outlook. Standard & Poor’s (A+/A-1) and Fitch (A/F1) left their ratings unchanged in 2023, each with a stable outlook.
As it had done in the previous year, Erste Group opened up the capital markets for financial institutions by issuing a covered bond. The EUR 1 billion mortgage covered bond with a 6-year tenor priced at MS+20bps was followed, just one week later, by a EUR 750 million 8NC7 callable Green Senior Preferred note (MS+125bps).
After the capital markets’ turmoil of March 2023, Erste Group issued a EUR 1 billion mortgage-covered bond with a 4.5-year tenor priced at MS+20bps, thereby proving its solid access to the capital markets. In May, Erste Group returned to the capital markets with a EUR 750 million Senior Preferred note. The 7NC6 transaction was priced at MS+125bps.
The peak of the funding year was the new issuance of a EUR 500 million perpNC5.6 8.5% transaction, which was announced at the same time as a buyback offer for an existing AT1 issue. The buyback offer was taken up by 66% of investors and contributed significantly to the optimisation of the debtstructure.
The funding year 2023 closed in November upon issuance of a EUR 750 million mortgage-covered bond with a 5.5-year tenor (MS+40bps).
Open an regular communication with investors and analysts
In the year ended, the management and the investor relations team met with investors in a total of 244 one-on-one and group meetings. Questions raised by investors and analysts were answered both at events with in-person attendance and virtually during telephone or video conferences. For the first time since 2019, the presentation of the 2022 annual result in Vienna was again followed by an analysts’ dinner and a road show day with investor meetings in London. Road shows were likewise conducted in Europe and the US after the release of first and third quarter results. Erste Group presented its performance and strategy against the backdrop of the current environment at international banking and investor conferences organised by the Vienna Stock Exchange, HSBC, PKO, Morgan Stanley, Concorde, RCB, UBS, Deutsche Bank, Bank of America, Goldman Sachs, Barclays, mBank and Wood. 63 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, road shows and investors’ days hosted by the European Covered Bond Council (ECBC), LBBW, UBS, Citigroup, Danske Bank and Barclays. The website https://www.erstegroup.com/en/investors 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 X (formerly Twitter) at https://www.x.com/ErsteGroupIR. This site provides users with the latest news on Erste Group on the social web. More details on the social media channel, the news/reports subscription and reminder service are available at https://www.erstegroup.com/en/investors/ir-service.
Analyst recommendations
In 2023, 21 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, Carraighill, Citigroup, Concorde, Deutsche Bank, Exane BNP, Goldman Sachs, HSBC, JP Morgan, JT Banka, KBW, Kepler Cheuvreux, mBank, Mediobanca, PKO, RBI, Société Générale, UBS and Wood. As of the end of the year, 17 analysts had issued buy recommendations, three had rated the Erste Group share as neutral and one as underperform. The average year-end target price stood at EUR 46.3. The latest updates on analysts’ estimates for the Erste Group share are posted at
https://www.erstegroup.com/en/investors/share/analyst-estimates.
* 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 employees private 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
