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31.07.2019

Erste Group posts solid HY profit of EUR 732 million, driven by highest operating result in five years

"We are very satisfied with our net profit of EUR 732 million for the first half of this year – it is a strong result. In particular, it is a strong result because it is based on a foundation of solid key indicators ranging from operating income and operating expenses to risk costs, capital and liquidity. Of course there is always room to further improve our performance, but we are moving in the right direction,” says Andreas Treichl, CEO of Erste Group Bank AG.

“The healthy macroeconomic growth in our region, which remains the growth powerhouse of the European Union, is also reflected in the 7 percent increase year-on-year in our customer loans volume to EUR 155.3 billion, However, the increase in our customer deposits by 8 percent to EUR 169.7 billion is a cause for concern during what continues to be a low interest rate environment – deposits are not anymore the basis on which our customers can build their financial well-being. One of our main tasks in the coming years will be to develop attractive investment products with adequate risk levels,” Treichl continues.

The current conditions make us confident about reaching the goals that we have set for our 200 anniversary year: growing our income at a rate higher than expenses, keeping risk costs low, and achieving a solid return on equity of above 11 percent.”

Highlights

Financial results from January-June 2019 are compared with those from January-June 2018 and balance sheet positions as of 30 June 2019 with those as of 31 December 2018.

Net interest income increased – mainly in the Czech Republic, but also in other core markets – to EUR 2,329.7 million (EUR 2,213.8 million). Net fee and commission income rose to EUR 980.4 million (EUR 959.3 million), primarily on the back of payment services and from lending. While net trading result improved significantly to EUR 310.1 million (EUR 11.9 million), the line item gains/losses from financial instruments measured at fair value through profit or loss declined to EUR -140.1 million (EUR 66.6 million), the development of both line items was driven by valuation effects. Operating income rose to EUR 3,592.9 million (+6.5%; EUR 3,374.1 million). The increase in general administrative expenses to EUR 2,146.0 million (+3.3%; EUR 2,076.5 million) was mainly attributable to a rise in personnel expenses to EUR 1,255.9 million (+3.2%; EUR 1,216.7 million). Other administrative expenses included almost all payments to deposit insurance systems expected in 2019 in the amount of EUR 92.9 million (EUR 80.2 million). The increase in amortisation and depreciation to EUR 264.6 million (EUR 232.3 million) is attributable to the first-time application of the new financial reporting standard for leases (IFRS 16) as of 1 January 2019, while a corresponding positive effect was recorded in other administrative expenses. Overall, the operating result increased to EUR 1,446.9 million (+11.5%; EUR 1,297.6 million) and the cost/income ratio improved to 59.7% (61.5%).

Due to net releases on the back of continued solid asset quality, the impairment result from financial instruments amounted to EUR 42.8 million or, adjusted for net allocation of provisions for commitments and guarantees given, 2 basis points of average gross customer loans (EUR 73.2 million or -12 basis points). This was mainly attributable to substantial income received from the recovery of loans already written off, primarily in the Czech Republic and in Hungary, as well as from releases of provisions for commitments and guarantees in Austria, the Czech Republic and Romania. The NPL ratio improved further to 2.8% (3.2%). The NPL coverage ratio increased to 75.4% (73.4%).

Other operating result amounted to EUR -351.0 million (EUR -204.6 million). The deterioration is attributable to a provision in the amount of EUR 150.8 million set aside for losses expected from a decision of the Romanian High Court in relation to the business activities of a local subsidiary. The expenses for the annual contributions to resolution funds included in this line item rose – in particular in the Czech Republic – to EUR 76.3 million (EUR 71.3 million). Banking and transaction taxes were slightly higher at EUR 64.7 million (EUR 63.3 million), including EUR 12.6 million (EUR 13.8 million) in Hungarian banking taxes posted upfront for the full financial year. Other taxes were nearly unchanged at EUR 6.4 million (EUR 6.5 million).

The minority charge rose due to significantly better results from the savings banks to EUR 205.2 million (EUR 165.5 million). The
net result attributable to owners of the parent declined to EUR 731.9 million (EUR 774.3 million).

Total equity not including AT1 instruments rose to EUR 18.2 billion (EUR 17.9 billion). After regulatory deductions and filtering in accordance with the CRR, common equity tier 1 capital (CET1, final) amounted to EUR 16.1 billion (EUR 15.5 billion), total own funds (final) to EUR 21.8 billion (EUR 20.9 billion). Interim profit is included in the above figures. Total risk – risk-weighted assets including credit, market and operational risk (CRR, final) – rose to EUR 118.8 billion (EUR 115.4 billion). The common equity tier 1 ratio (CET1, final) stood at 13.5% (13.5%), the total capital ratio at 18.3% (18.1%).

Total assets rose to EUR 248.3 billion (EUR 236.8 billion). On the asset side, cash and cash balances decreased to EUR 16.8 billion (EUR 17.5 billion), while loans and advances to credit institutions increased to EUR 23.0 billion (EUR 19.1 billion). Loans and advances to customers rose to EUR 155.3 billion (+4.0%; EUR 149.3 billion). On the liability side, deposits from banks increased to EUR 19.0 billion (EUR 17.7 billion) and customer deposits grew again – most notably in the Czech Republic and in Austria – to EUR 169.7 billion (+4.3%; EUR 162.6 billion). The loan-to-deposit ratio stood at 91.5% (91.8%).

Outlook

Operating environment anticipated to be conducive to credit expansion.
Real GDP growth is forecast to come in at around 3-4% in Erste Group’s CEE core markets and about 2% in Austria in 2019, again driven primarily by robust domestic demand. In CEE, economic activity should be supported by real wage growth and low unemployment. Fiscal discipline is expected to be maintained across CEE.

Business outlook. Erste Group aims to achieve a return on tangible equity (ROTE) of more than 11% in 2019 (based on average tangible equity in 2019). The underlying assumptions are: revenues rising faster than costs (based on mid-single digit net loan growth), risk costs higher, but still at a historically benign level (up to 10 basis points), with a tax rate of below 20%.

Risks to guidance. Impact from other than expected interest rate development; political or regulatory measures against banks; as well as geopolitical and global economic risks.