Investor information 2023

28.02.2023- Erste Group: Preliminary results 2022

Erste Group posts net profit of EUR 2,164.7 million in 2022;
proposes dividend of EUR 1.9 per share

HIGHLIGHTS

P&L 2022 compared with 2021; balance sheet as of 31 December 2022 compared with 31 December 2021

Net interest income increased to EUR 5,950.6 million (+19.6%; EUR 4,975.7 million) driven by rate hikes and strong loan growth across all of the seven core markets. Net fee and commission income rose to EUR 2,452.4 million (+6.5%; EUR 2,303.7 million). Increases were posted across nearly all fee and commission income categories and all core markets, with significant growth seen in particular in payment services and asset management. Net trading result declined to EUR -778.6 million (EUR 58.6 million); the line item gains/losses from financial instruments measured at fair value through profit or loss rose to EUR 731.3 million (EUR 173.2 million). The development of these two line items was mostly attributable to valuation effects resulting from movements in interest rates. Operating income increased to EUR 8,570.6 million (+10.7%; EUR 7,742.0 million). General administrative expenses were up at EUR 4,574.9 million (+6.2%; EUR 4,306.5 million). Personnel expenses rose to EUR 2,668.0 million (+3.5%; EUR 2,578.1 million), other administrative expenses to EUR 1,356.2 million (+14.9%; EUR 1,180.3 million). Payments into deposit insurance schemes included in other administrative expenses were higher at EUR 142.9 million (EUR 122.4 million). Depreciation and amortisation rose to EUR 550.7 million (+0.5%; EUR 548.0 million). Overall, the operating result improved significantly to EUR 3,995.8 million (+16.3%; EUR 3,435.5 million) as did the cost/income ratio to 53.4% (55.6%).

Due to net allocations, the impairment result from financial instruments amounted to EUR -299.5 million or 15 basis points of average gross customers loans (EUR -158.8 million or 9 basis points). Net allocations to credit loss allowances were posted in all core markets, with the exception of Croatia; provisions were driven mainly by updated credit risk parameters based on the latest macro-scenarios (FLIs) as well as portfolio stage overlays for cyclical and energy intense industries. At the end of December, crisis-induced performing risk provisions stood at EUR 928 million. The NPL ratio based on gross customer loans improved to a historic low at 2.0% (2.4%). The NPL coverage ratio (excluding collateral) increased to 94.6% (90.9%).

Other operating result amounted to EUR -398.5 million (EUR -310.5 million). This deterioration was due to higher banking levies and increased annual contributions to resolution funds. Banking levies – currently payable in two core markets – increased to EUR 187.1 million (EUR 73.5 million). Thereof, EUR 124.1 million were charged in Hungary. Banking levies included regular banking tax in the amount of EUR 15.1 million (EUR 15.0 million), transaction tax in the amount of EUR 59.1 million (EUR 47.9 million) and a new windfall profit tax of EUR 49.9 million based on the net revenues of the preceding year. In Austria, banking tax equalled EUR 63.0 million (EUR 10.5 million). Half of this rise is due to a one-off effect in 2022. The annual contributions to resolution funds rose – most markedly in Austria and the Czech Republic – to EUR 139.1 million (EUR 108.6 million).

Taxes on income increased to EUR 556.1 million (EUR 525.2 million). The non-controlling interests charge improved further to a record level of EUR 501.6 million (EUR 484.8 million) due to significantly higher earnings contributions of the savings banks. The net result attributable to owners of the parent rose to EUR 2,164.7 million (EUR 1,923.4 million) on the back of the strong operating result and low risk costs.

Total equity not including AT1 instruments rose to EUR 23.1 billion (EUR 21.3 billion). After regulatory deductions and filtering in accordance with the CRR, common equity tier 1 capital (CET1, final) rose to EUR 20.4 billion (EUR 18.8 billion), as were total own funds (final) to EUR 26.2 billion (EUR 24.8 billion).

Total risk – risk-weighted assets including credit, market and operational risk (CRR, final) – increased to EUR 143.9 billion (EUR 129.6 billion). The common equity tier 1 ratio (CET1, final) stood at 14.2% (14.5%), the total capital ratio declined to 18.2% (19.1%).

Total assets increased to EUR 323.9 billion (+5.4%; EUR 307.4 billion). On the asset side, cash and cash balances declined, primarily in Austria, to EUR 35.7 billion (EUR 45.5 billion) due to the repayment of TLTRO III funds. Loans and advances to banks were lower at EUR 18.4 billion (EUR 21.0 billion). Loans and advances to customers (net) rose to EUR 202.1 billion (+12.1%; EUR 180.3 billion). On the liability side, deposits from banks declined to EUR 28.8 billion (EUR 31.9 billion). Customer deposits increased in all core markets – most strongly in Austria and the Czech Republic – to EUR 224.0 billion (+6.4%; EUR 210.5 billion). The loan-to-deposit ratio rose to 90.2% (85.6%).

OUTLOOK 2023

Erste Group’s goal for 2023 is to achieve a return on tangible equity (ROTE) in the range of 13 to 15%. Four key factors will support achievement of this goal: firstly, positive economic growth in all core markets (Austria, Czech Republic, Slovakia, Romania, Hungary, Croatia and Serbia) despite significant geopolitical and political risks, which, should they materialise, would likely negatively impact economic performance; secondly, an interest rate environment that is characterised by broadly stable central bank rates in such countries as the Czech Republic, Romania and Hungary, as well as euro zone interest rates that rise in line with market expectations (as per mid-February 2023); thirdly, a credit risk environment marked by low default rates as in 2022; and, finally, the continuous ability of Erste Group to innovate and successfully expand its digital offering. Assuming that these conditions are met, operating result and the cost/income ratio are projected to improve, putting Erste Group on a path to achieve its cost/income ratio target of approximately 52% by 2024.

The current expectation (as per mid-February 2023) by economists is for Erste Group’s core markets to avoid recession in 2023 and, in fact, to post real GDP growth in the order of 0 to 3% in 2023. Inflationary pressures are expected to subside in 2023, following double digit-levels in 2022 as a result of exceptionally high energy prices. Continued strong labour markets should be supportive of economic performance in all of Erste Group’s markets. Current account balances, which suffered significantly during 2022 on the back of exceptionally high energy prices, are expected to improve again in 2023 benefiting from a reversal in energy prices. Fiscal balances should likewise consolidate again after significant budget deficits in 2022. Public debt to GDP in all Erste Group markets is projected to be broadly stable, and hence remain materially below the euro zone average.

Against this backdrop, Erste Group expects net loan growth in the mid-single digits. Retail and corporate business should contribute in all markets of Erste Group towards the aim to grow in line with the banking markets. Loan growth as well as interest rate tailwinds, as detailed above, should result in an increase of net interest income of approximately 10%. The second most important income component – net fee and commission income – is expected to rise in the mid-single digits. As in 2022, positive growth momentum should again come from payment services and insurance brokerage fees, while additional contributions form asset management and securities business are dependent on a constructive capital markets environment. The net trading and fair value result, which suffered significantly in 2022 from negative valuation effects tied to strongly rising interest rates mostly in the CEE region but also in the eurozone, should normalise again in 2023 due to less steep interest rate increases in the eurozone. This, however, will depend substantially on the actual interest rate environment. The remaining income components are forecast to remain, by and large, stable. Overall, operating income should increase in 2023.
Operating expenses are expected to rise by 7-8%, and thus at a lower level than operating income – although this is dependent on the foreign-currency developments in the CEE region – resulting in a further cost/income ratio improvement compared to 2022.

Based on the robust macro outlook described above, risk costs should remain at a low level in 2023. While precise forecasting is hard at current low risk cost levels, Erste Group believes that in 2023 risk costs will be below 35 basis points of average gross customer loans.

Other operating result is expected to remain by and large unchanged in the absence of significant one-off effects. Assuming an effective group tax rate of below 20% and similar minority charges as in 2022, Erste Group aims to achieve a ROTE in the range of 13 to 15%. Erste Group’s CET1 ratio is expected to remain strong. Consequently, Erste Group will propose a dividend of EUR 1.90 per share for the 2022 fiscal year to the 2023 AGM. In addition, Erste Group targets a share buy-back in a volume of up to EUR 300 million in 2023, subject to regulatory approval.

Potential risks to the guidance include (geo)political and economic (including monetary and fiscal policy impacts) developments, regulatory measures as well as global health risks and changes to the competitive environment. The evolving Russia-Ukraine conflict does not impact Erste Group directly, as it has no operating presence in those countries. Indirect effects, such as financial market volatility, sanctions-related knock-on effects or the emergence of deposit insurance or resolution cases cannot be ruled out, though. Erste Group is moreover exposed to non-financial and legal risks that may materialise regardless of the economic environment. Worse than expected economic development may put goodwill at risk.