31.07.2020

Erste Group reports half-year results 2020

Record capitalization, while decline in net profit reflects forward-looking risk costs provisioning; well-positioned to back customers and drive CEE’s economic recovery

“I want to thank all our employees in Austria and the CEE region for their exceptional work under the most difficult of circumstances over the past few months. As one of the leading financial institutions in CEE, Erste Group’s actions have been critical to keeping the region’s economies going. Among other things, we have been the transmission channel for over 16 billion euros in government measures and have kept almost all branches open, while our digital platform George has experienced record usage. Our efforts have helped individuals and companies in the region to meet their financial needs,” says Bernd Spalt, CEO of Erste Group Bank AG.

“The development of risk costs was the key driver impacting our profit in the first half of 2020. Although our NPL ratio remained at a historically low level of 2.4 percent, we vigilantly planned ahead to already take into account the expected deterioration in asset quality as far as possible at this point in time. We set aside risk provisions of 675 million euros in the first six months of the year. This led our net profit for the period to decline to 294 million euros.

Deposit growth was again strong at more than five percent, reflecting the trust that customers place in us. Loan volumes rose over two percent, boosted by government measures such as loan moratoria and guaranteed loans. The clearest sign of our strong positioning: a record high capitalization, visible in our CET1 ratio of 14.2 percent, far above the regulatory minimum requirement.

Given the robust underlying result, solid capitalization and profitable business model, customers can continue to rely on Erste as a strong partner even in these unprecedented times.”

HIGHLIGHTS

^{Financial results from January-June 2020 are compared with those from January-June 2019 and balance sheet positions as of 30 June 2020 with those as of 31 December 2019.}

EARNINGS PERFORMANCE IN BRIEF

Net interest income increased – mainly in Austria, but also in Romania – to EUR 2,396.9 million (+2.9%; EUR 2,329.7 million). Net fee and commission income declined to EUR 956.7 million (-2.4%; EUR 980.4 million) as lower income from payment services and lending was offset only partly by higher income from other fee and commission income categories. While net trading result declined significantly to EUR -19.2 million (EUR 310.1 million), the line item gains/losses from financial instruments measured at fair value through profit or loss improved to EUR 28.5 million (EUR -140.1 million), both line items being impacted by valuation effects due to market volatility amid the Covid-19 outbreak. Operating income decreased to EUR 3,471.9 million (-3.4%; EUR 3,592.9 million). General administrative expenses declined to EUR 2,114.7 million (-1.5%; EUR 2,146.0 million). While personnel expenses rose to EUR 1,265.5 million (+0.8%; EUR 1,255.9 million, other administrative expenses were reduced to EUR 583.3 million (-6.7%; EUR 625.5 million). Almost all payments into deposit insurance schemes expected for 2020 – EUR 92.3 million (EUR 92.9 million) – are already included in other administrative expenses. Amortisation and depreciation amounted to EUR 265.9 million (EUR 264.6 million). Overall, the operating result declined to EUR 1,357.2 million (-6.2%; EUR 1,446.9 million). The cost/income ratio rose to 60.9% (59.7%).

Due to net allocations, the impairment result from financial instruments amounted to EUR -675.4 million or 82  basis points of average gross customers loans (net releases of EUR 42.8 million or 2 basis points). Allocations to provisions for loans as well as for commitments and guarantees given went up in all core markets. This marked rise in allocations to provisions was primarily driven by the deterioration in the macroeconomic outlook due to Covid-19. A positive contribution came from high income from the recovery of loans already written off in Romania. The NPL ratio based on gross customer loans improved to 2.4% (2.5%). The NPL coverage ratio increased to 91.1% (77.1%).

Other operating result improved to EUR -169.9 million (EUR -351.0 million). Expenses for the annual contributions to resolution funds included in this line item rose – in particular in Austria – to EUR 93.7 million (EUR 76.3 million). The rise in banking and transaction taxes to EUR 83.0 million (EUR 64.7 million) is primarily attributable to the doubling of banking levies in Slovakia to EUR 33.8 million (EUR 16.0 million) as the change in the law adopted in 2019 took effect as of 1 January 2020. Hungarian banking tax for the entire financial year 2020 was EUR 14.3 million (EUR 12.6 million). In the comparative period, other operating result included allocations to a provision in the amount of EUR 150.8 million set aside for losses expected to result from a supreme court decision concerning the business activities of a Romanian subsidiary.

Taxes on income declined to EUR 140.3 million (EUR 212.7 million). The minority charge decreased to EUR 76.1 million (EUR 205.2 million) due to significantly lower earnings contributions of the savings banks. The net result attributable to owners of the parent amounted to EUR 293.8 million (-59.9%; EUR 731.9 million).

Total equity not including AT1 instruments rose to EUR 19.2 billion (EUR 19.0 billion). After regulatory deductions and filtering in accordance with the CRR, common equity tier 1 capital (CET1, final) increased to EUR 16.4 billion (EUR 16.3 billion), total own funds (final) amounted to EUR 22.0 billion (EUR 22.0 billion). Interim profit is included in the above figures. Total risk – risk-weighted assets including credit, market and operational risk (CRR, final) – decreased to EUR 115.3 billion (EUR 118.6 billion). The common equity tier 1 ratio (CET1, final) increased to 14.2% (13.7%), the total capital ratio to 19.1% (18.5%).

Total assets increased to EUR 264.7 billion (EUR 245.7 billion). On the asset side, cash and cash balances rose to EUR 18.4 billion (EUR 10.7 billion), loans and advances to banks to EUR 27.4 billion (EUR 23.1 billion). Loans and advances to customers increased to EUR 163.7 billion (+2.2%; EUR 160.3 billion). On the liability side, deposits from banks grew significantly to EUR 22.0 billion (EUR 13.1 billion) as a result of increased ECB refinancing (TLTROs). Customer deposits rose again – in particular in the Czech Republic and Austria – to EUR 182.7 billion (+5.1%; EUR 173.8 billion). The loan-to-deposit ratio stood at 89.6% (92.2%).

OUTLOOK

World-wide, the year 2020 has been characterised by the Covid-19 pandemic. The wide-ranging economic and social restrictions imposed to contain the coronavirus have caused significant economic upheaval. The macroeconomic downturn is a direct consequence of the varying degrees of lockdowns of public life imposed by governments world-wide. To mitigate the sometimes dramatic negative impact, all states have passed substantial relief packages ranging from debt moratoria for bank loans, guarantees and bridge financing, short-time work schemes and tax deferrals to direct payments. Central banks have cut interest rates, provided liquidity on an unprecedented scale and decided to buy government and corporate bonds. Bank regulators have reduced capital requirements and recommended a pragmatic interpretation of financial accounting standards as well as postponing dividend payments to a later date.

Against this backdrop, gross domestic product is expected to decline markedly, by four to nine percent, in Austria and Central and Eastern Europe in 2020. This should be followed by a recovery in the year 2021, which, however, will not be following a linear path depending on developments on the health side and the administrative measures taken. With economic activity reduced, operating income is expected to decrease. Specifically, it is expected that 2020 net interest income will decline on the back of substantial rate cuts in the Czech Republic, Romania, Hungary and Serbia, lower organic lending growth, a changed portfolio composition with state-guaranteed business at lower margins and negative currency effects. Net fee and commission income is expected to be adversely affected by weaker economic activity. A decline in net trading and fair value result had already been forecast even before the breakout of the coronavirus in view of the strong positive valuation results posted in 2019. In this environment, operating expenses should improve year on year, supported by lower travel expenses, savings due to increased efficiency and positive foreign currency effects. In 2020, the main impact on profit will come from risk costs: for the full year, risk provisions are expected to amount to 65 to 80 basis points of average gross customer loans. The management board of Erste Group is aiming to frontload as much risk costs as is justifiable based on macroeconomic data and forecasts, the development of company ratings and an assessment of the retail customer portfolio. In the absence of goodwill writedowns, other operating result should improve in 2020 versus 2019, when it was weighed down by substantial one-off effects. The tax rate will very likely rise as profitability in countries with low tax rates is forecast to decline. Overall, net profit is expected to decrease significantly in 2020.

The common equity tier 1 ratio (CET1 ratio) is expected to remain at a solid level offering significant room to manoeuvre should the economic development deteriorate. Medium-term, the Erste Group’s target common equity tier 1 ratio continues to be 13.5%. Erste Group is confident and determined to pay a cash dividend for the financial year 2019 as well as for 2020 once the ban on dividend payments imposed by the supervisory authority is lifted effective 1 January 2021, depending, of course, on the economic and business outlook.

Potential risks to the guidance are a longer-than-expected duration of the Covid-19 crisis, impacts from other than expected interest rate developments, political or regulatory measures against banks as well as geopolitical and global economic developments. In addition, a deterioration of the economic environment could lead to goodwill writedowns. Erste Group is moreover exposed to legal risks that may materialise regardless of the economic environment.