Letter from the CEO
Peter Bosek © Erste Group / Marko Mestrovic
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Dear shareholders,
I am pleased to present to you, for the first time, the annual result of Erste Group along with the outlook for the current year. 2024 was a very successful year for us. With a net profit of EUR 3,125 million, we posted an excellent result. We have achieved all of the goals we had revised upwards in the course of the year. Erste Group’s proven business model and the focus on our seven core markets enabled us to generate organic lending growth of nearly 5%. The inflow of customer deposits also remained steady, most importantly from retail customers and SMEs. Our capital base continues to be strong, thus offering us strategic scope for capital allocation. Going forward, the first priority remains growth in our region, i.e. lending to retail customers and businesses.
Our region saw a moderate recovery of the economy, yet economic performance was a mixed bag. Austria failed to meet expectations and registered a mild recession for the second year in a row. In our CEE core markets, 2024 GDP growth rates ranged between 0.5% in Hungary and 3.9% in Serbia, supported mainly by household consumption. Labour markets remained robust despite the weakness of the economy.
Inflation declined across all core markets and is now in the low to medium single digits, which has led to rate cuts in all markets. In 2024, the European Central Bank lowered its policy rate in four steps from 4.00% to 3.00%. Most of the CEE central banks likewise eased their monetary policies further. The central banks of Hungary and the Czech Republic had already started trimming their policy rates in the final quarter of 2023, while the central banks of Serbia and Romania followed suit only in the second and fourth quarters of 2024, respectively.
What was the effect of these fundamentals on our result? The two most important income components again posted growth: net interest income rose by 4.2% to EUR 7.5 billion and thus far beyond what had been forecast at the beginning of 2024. While all CEE markets registered growth – in Romania, Hungary, Czech Republic and Serbia, i.e. the markets outside the euro zone, even at double-digit rates – net interest income in Austria was down. It is worth noting that we were able to keep the net interest margin nearly stable in the face of falling market interest rates. At the same time, net fee and commission income hit a record high at EUR 2.9 billion. The 11.3% rise is all the more remarkable as the baseline had already been elevated due to strong growth seen in previous years. Growth was achieved in all core markets, with particularly strong performance in payment services and asset management. Overall, operating income came in at EUR 11.2 billion, almost 6% higher than in the previous year. Operating expenses increased by around 5% to EUR 5.3 billion, in line with expectations. Inflationary pressure had an impact on collective salary negotiations, most importantly in Austria. Personnel expenses were up at EUR 3.2 billion. The block of 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 450 million in 2024. The strong operating result was reflected in a cost/income ratio of 47.2%, which is excellent for our business model.
Asset quality was, overall, very good again in 2024, particularly in the retail customer business, due last but not least to low unemployment rates. Remarkably, the CEE core markets outperformed Austria for the first time. The NPL ratio rose moderately to 2.6% at year-end. Overall, (net) allocations to provisions amounted to EUR 397 million in 2024, which equals a provisioning ratio of 18 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) and stage overlays.
After a slow start in the first months of the year, demand for loans rose markedly towards the end of the year. Overall, net customer loan volume increased by 4.9% to EUR 218.1 billion. Growth momentum was seen across the entire region, most notably in Austria, Czech Republic, Romania and Slovakia. Particularly noteworthy was the budding recovery of the mortgage business in the Czech Republic and at Erste Bank Oesterreich. Corporate lending was likewise more dynamic in the fourth quarter than in the first nine months of 2024.
Deposit inflow continued, with customer deposits up by nearly 4%. The strongest deposit growth, at a rate of 5.2%, was seen in the retail and SME business and from customers of savings banks. Because of our business model and solid market positions in our core markets, Erste Group has a very large proportion (nearly 80%) of these highly granular customer deposits. The central banks’ rate cuts, moreover, slowed down the shift from demand deposits to term deposits. At the end of December 2024, the loan-to-deposit ratio stood at 90.2%.
Similarly successful were funding activities in the capital markets. Not only the parent company but also a number of local subsidiaries in CEE countries issued benchmark bonds in various asset classes and placed these issues both locally and internationally.
Erste Group’s strong capitalisation is another point that I wish to highlight once again. Erste Group’s strong capital base and sustainable profitability are the preconditions for the bank’s future growth and ability to pay dividends and expand our scope of action. At 15.1% as of the end of December 2024, the common equity tier 1 ratio (final) was again substantially above the regulatory minimum requirement and our target of 14%.
For the 2024 fiscal year, the management board will propose a dividend of EUR 3.0 per share at the annual general meeting in line with our policy of distributing between 40 to 50% of net profit after the deduction of AT1 dividends. In addition, after the successful completion of the second share buyback programme with a volume of EUR 500 million at year-end 2024, Erste Group is seeking to launch another such programme with a volume of EUR 700 million (subject to regulatory approval). Both the dividend and the share buyback programme were considered in calculating the common equity tier 1 ratio.
Sustainability aspects have always been integral components of the strategy of Erste Group, which is firmly embedded in the real economy. Where sustainability is concerned, the priorities defined are based on the conviction that the green transition and social inclusion may have a positive impact on the long-term prosperity of our region.
In 2024, Erste Group Bank AG integrated the sustainability statement into the management report. This report uses the European Sustainability Reporting Standards (ESRS) as a framework along with the requirements of Article 8 of EU Regulation 2020/852 (EU Taxonomy). For further information on goals, emission reduction pathways and sustainability initiatives of Erste Group, as well as a variety of ESG metrics, please refer to the management letter and our website.
In the current fiscal year of 2025, we expect solid loan growth of about 5% on the back of a moderate acceleration of economic growth, supported by both the retail and the corporate business. This should help to keep net interest income stable.
Net fee and commission income is projected to continue its positive trend and increase by about 5%. Assuming a rise in operating expenses (including expenses for strategic initiatives) by about 5%, we expect that we will be able to achieve a cost/income ratio of less than 50%. Given the stable environment, most notably in the CEE markets, we expect risk costs of approximately 25 basis points in 2025. This should yield a continued solid return on tangible equity (ROTE) of around 15%.
Working with my management team, I have been leading Erste Group, one of the largest financial institutions in Central and Eastern Europe, since July 2024. The focus of our employees in all of the seven core markets – Austria, Czechia, Slovakia, Romania, Hungary, Croatia and Serbia – has always been on the purpose of the business, which has remained unchanged since its foundation in 1819: creating and spreading prosperity. To ensure that our business model will remain relevant and successful in the future, we are working on strategic initiatives. Our focus is on the continuing development of our brand identity, a wide range of topics relating to digitalisation and the commitment to consider M&A transactions in our region to complement organic growth.
Talking about digitalisation: across the group, nearly eleven million customers were using our digital platform George as of year-end 2024. The number of digital transactions has been rising steadily. By now, more than half of all retail business products are already distributed digitally. Supported by technology, we are planning to offer our customers broader access to financial advice than has ever been feasible in the past. Progress is likewise being made in increasing efficiency through digitalisation, i.e. by automating transactions and processes and using digital data analysis.
It is of special importance to me to thank the employees of Erste Group for their personal commitment. Our joint efforts and dedication to strategic initiatives provide an excellent basis for further strengthening and expanding Erste Group’s position in the CEE region.
Management
Erste Group on the capital markets
After the strong gains recorded in the previous year, international equity markets continued their upward trends in 2024 amid the impacts of geopolitical events, interest rate policies, inflation development and economic activity. Equity markets’ performance was supported by expectations of falling interest rates, which were met by the central banks in the course of the year. Continued strong demand for technology shares (buzzword: artificial intelligence) provided an extra boost. At the same time, market volatility was fuelled by mixed macroeconomic conditions in Europe and China, as well as concerns about an economic downturn, geopolitical crises and uncertainty regarding potential shifts in the political environment in Europe and the US. Finally, market performance was also driven significantly by rate cuts implemented by European and US central banks as well as the announcement of fiscal policy stimuli in China. Most of the indices covered again posted marked gains.
Turnaround in monetary policies
The central banks’ restrictive rate policies and the series of rate hikes designed to curb inflation rates that had reached record levels in 2022 proved effective. Inflation was moving towards the 2% target rate, and the major central banks maintained a wait-and-see approach at the beginning of the year regarding a possible end to the rate cycle and held on to their policy rate levels for the time being. Their focus was on inflation momentum, the economy and the labour market. After a number of national central banks had already started to ease their monetary policies, the European Central Bank (ECB) carried out its first policy rate cut since 2019 in June. The US Federal Reserve (Fed) followed suit in September. Both central banks continued relaxing their monetary policies until year-end 2024, cutting rates in several steps. In Europe, the policy rate stood at 3% at year-end, while in the US the effective policy interest rate was set at a range of 4.25% to 4.50%.
Global economic growth
The global economy has proved resilient over the past years. Despite diverse developments in individual countries and sectors, global economic growth has remained stable while inflation has receded further at the same time. This resilience is expected to continue. After 3.2% growth forecast for 2024, global GDP growth is expected to run at 3.3% in both 2025 and 2026, while inflation should keep falling towards the central banks’ target levels. Growth prospects vary considerably by region. In the US, GDP growth is projected to come in at 2.8% in 2024 and 2.7% in 2025 before slowing down to 2.1% in 2026. In the euro area, the recovery of real household incomes, robust labour markets and policy rate cuts will keep driving growth. In the euro area, GDP is forecast to grow by 0.8% in 2024, 1.0% in 2025 and 1.4% in 2026. Risks to these outlooks include, most importantly, increasing trade tensions and protectionism, as well as fiscal policy challenges in a number of countries. The performance of Asian economies, most prominently China, will also continue to have a significant impact on global growth.
Equity markets at record highs
In the reporting period, growth was most pronounced in the US stock markets, whose performance benefited substantially from the strong growth momentum of US technology and AI-oriented companies. The boom was led first and foremost by the “Magnificent 7” (Microsoft, Apple, Nvidia, Alphabet, Amazon, Meta, Tesla), which account for more than 30% of the global market capitalisation of the S&P 500 Index. The performance of technology shares and the monetary policy turnaround started by the central banks was reflected in the performance of most equity markets and their new record highs, with the biggest gains posted by the US indices. As of the end of December, the NASDAQ Composite technology index was up 28.6% at 19,310.79 points. The broader Standard & Poor’s 500 Index rose 23.3% to 5,881.63 points in the year ended, and the Dow Jones Industrial Average Index broke through 40,000 points for the first time in 2024 and ended the reporting period 12.9% higher at 42,544.22 points. In Europe, new highs were set by the German DAX index, which saw the steepest rise, by 18.8%, the British FTSE 100 and the Austrian ATX Total Return. The Stoxx Europe 600 Index, which comprises the largest European equities, likewise hit a new record high in the course of the year and, at year-end, had advanced by 6.0%, reaching 507.62 points. In Asia, the Japanese Nikkei 225 Index was up 19.2% while the Chinese CSI-300 Index gained 14.7%.
Bank shares recorded further gains
As in the previous year, banks were again among the favoured industries in 2024. The banking sector benefited from the fact that the initial rate cuts were implemented later than planned. Solid results, low risk costs, positive outlooks and planned dividend payments provided the basis for further rises in share prices in the reporting period. After advancing by more than 20% in the previous year, the Dow Jones Euro Stoxx Banks Index, which is composed of the leading European bank shares, posted another rise, by 23.4% to 146.04 points, in the year ended.
ATX Total Return Index at all-time high
Austrian equity indices likewise continued the upward trajectories seen in the previous year. Moving in tandem with the broader Stoxx Europe 600 Index, the Austrian Traded Index (ATX) was up 6.6% at year-end 2024, at 3,663.01 points. The ATX Total Return Index (including dividends) set multiple new highs in the course of the year and ended the year at 8,536.92 points, up 12.1%. This performance was underpinned by the strong performance of the bank shares, which are heavily weighted in the index. The Erste Group share was among the top performers, having gained more than 60%.
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 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: 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. In 2024, Erste Group participated in the CDP (Carbon Disclosure Project) rating for the third time; its sustainability measures were affirmed at B.
In late November, Standard & Poor’s upgraded Erste Group Bank AG’s outlook from stable to positive, confirming the A+/A-1 rating. It highlighted the bank’s improved capitalisation and solid results as well as the traditional strengths of the bank, namely funding and liquidity. Moody’s (A1/P-1) and Fitch (A/F1) left their ratings unchanged, each with a stable outlook.
In 2024, Erste Group again started the year early by issuing a EUR 1 billion, 7-year mortgage-covered bond (MS+50 bps), thereby opening up the covered bonds segment for European issuers. As investors’ appetite for longer tenors was gradually increasing, Erste Group decided to return to the capital markets as early as March 2024 by issuing another EUR 1 billion mortgage-covered bond (9.75-year tenor, MS+55 bps). Just before the market environment started clouding in the weeks that followed, Erste Group placed a EUR 750 million perpNC2031 AT1 instrument (7% coupon, MS+440.7 bps) linked, as in the previous year, with the repurchase of the outstanding AT1 instrument (5.125% perpNC2025).
The summer break for capital market transactions ended in August 2024, with Erste Group issuing a EUR 750 million 8NC7 format senior preferred bond at MS+90 bps. Even though this transaction almost fully covered the funding volume required, Erste Group opportunistically issued another benchmark transaction in the form of a EUR 750 million tier-2 bond (10.25NC5.25, MS+170 bps).
Open and regular communication with investors and analysts
In the year ended, the management and the investor relations team met with investors in a total of 274 one-on-one and group meetings. Questions raised by investors and analysts were answered both at events with in-person attendance and during telephone or video conferences. The presentation of the 2023 annual result was 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, Kepler, Morgan Stanley, RBI, UBS, Bank of America, Deutsche Bank, Goldman Sachs, Barclays, mBank and Wood. 96 meetings were held to intensify the dialogue with bond investors. A large number of one-on-one and group meetings with analysts and portfolio managers were held at conferences, road shows and investors’ days hosted by the European Covered Bond Council (ECBC), UBS, Citigroup, Danske Bank, Natixis und BNP Paribas. The Erste Group’s website (https://www.erstegroup.com/en/investors) provides comprehensive information on the banking group and the Erste Group share.
The investor relations team also provides news through Erste Group’s social media channels on platforms such as LinkedIn and Youtube. 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.