Erste Group net profit up 24.4% yoy to EUR 1.23 billion on growing revenues

"We are pleased that our strong operating performance and net profit in the first nine months of this year were driven by several healthy developments: all our home markets have been enjoying robust economic growth; we have been performing very well in Retail and SME business, increasing overall loans (+6.3% year to date) and deposits (+5.9% year to date); and we have also increased our digital advantage and improved customers' experience thanks to George, our pan-European digital platform that is now being used by over 3 million customers in 4 markets.

As the countries in CEE region are mostly riding a really good economic wave right now, our NPL ratio continued to decline to 3.5%. The NPL coverage remains high at 70.7%. On the other hand, we are experiencing incredibly low risk costs, which we should treat as a gift that will not be here forever. This makes the trend reversal that we have achieved in the operating result, driven by sustained growth in our core revenues - net interest and net fee and commission income were up 4.4% and 5.1% respectively - all the more important. Equally significant for our future is the strong level of capitalization: taking into account the net profit for third quarter and the positive impact of about 30 basis points resulting from the approval of a new operational risk model, our CET 1 ratio (Basel 3 fully loaded, pro forma) stands at 13.2%.

Based on this solid set of results, we are improving our outlook for the full year 2018 and target a return on tangible equity above 12%," said Andreas Treichl, CEO of Erste Group Bank AG.

HIGHLIGHTS

P&L: financial results from January-September 2018 are compared with those from January-September 2017 and balance sheet positions as of 30 September 2018 with those as of 31 December 2017.

Net interest income increased – mainly in the Czech Republic and Romania – to EUR 3,372.0 million (+4.4%; EUR 3,229.3 million). Net fee and commission income rose to EUR 1,430.7 million (+5.1%; EUR 1,361.9 million), mostly on the back of significantly higher income from brokerage commissions – mostly insurance products –, but also from payment services, asset management and lending. While net trading result was down at EUR -50.4 million (EUR 139.3 million), the line item gains/losses from financial instruments measured at fair value through profit or loss improved to EUR 165.8 million (EUR 12.1 million). Operating income rose to EUR 5,096.2 million (+3.2%; EUR 4,936.9 million). The increase in general administrative expenses to EUR 3,102.3 million (+2.9%; EUR 3,013.6 million) was mainly attributable to higher personnel expenses of EUR 1,830.5 million (+4.8%; EUR 1,747.2 million). Depreciation and amortisation was up (+2.7%); administrative expenses were almost unchanged (-0.4%). Other administrative expenses included almost all payments to deposit insurance systems expected in 2018 in the amount of EUR 84.2 million (EUR 74.7 million). Overall, the operating result was higher at EUR 1,993.9 million (+3.7%; EUR 1,923.4 million). The cost/income ratio improved slightly to 60.9% (61.0%).

The impairment result from financial instruments amounted to EUR 102.2 million or, adjusted for net allocation of provisions for commitments and guarantees given, -9 basis points of average gross customer loans (net allocations of EUR 71.5 million or 7 basis points) due to net releases on the back of improved asset quality. This was attributable to the substantial improvement in net allocations to risk provisions for the lending business across almost all segments, most notably in Croatia and Austria. The NPL ratio based on gross customer loans improved again to 3.5% (4.0%), the NPL coverage ratio to 70.7% (68.8%).

Other operating result amounted to EUR -237.0 million (EUR -296.6 million). It included expenses for the annual contributions to resolution funds in the amount of EUR 70.4 million (EUR 65.6 million). Banking and transaction taxes increased to EUR 88.1 million (EUR 82.1 million), including EUR 13.8 million (EUR 12.6 million) in Hungarian banking taxes booked upfront for the full financial year. Other taxes decreased to EUR 6.4 million (EUR 31.3 million). In the comparative period, other operating result had included EUR 45.0 million in provisions for losses from loans to consumers resulting from supreme court rulings regarding negative reference interest rates in Austria.

The minority charge rose to EUR 285.8 million (+4.8%; EUR 272.6 million). The net result attributable to owners of the parent increased to EUR 1,228.3 million (+24.4%; EUR 987.6 million).

Total equity not including AT1 instruments rose to EUR 17.4 billion (EUR 17.3 billion). Transition to the new financial reporting standard IFRS 9 as of 1 January 2018 resulted in a reduction of total equity by EUR 0.7 billion. After regulatory deductions and filtering in accordance with CRR, common equity tier 1 capital (CET1, Basel 3 phased-in) amounted to EUR 14.7 billion (EUR 14.7 billion), total own funds (Basel 3 phased in) to EUR 20.1 billion (EUR 20.3 billion). While half-year interim profit is included in the above figures, third quarter profit is not. Due to net releases in the third quarter no risk costs were deducted. Total risk (risk-weighted assets including credit, market and operational risk, Basel 3 phased-in) rose to EUR 117.0 billion (EUR 110.0 billion). The common equity tier 1 ratio (CET 1, Basel 3 phased-in) stood at 12.5% (13.4%), the total capital ratio (Basel 3 phased-in) at 17.2% (18.5%).

Total assets were up at EUR 234.8 billion (+6.4%; EUR 220.7 billion). On the asset side, cash and cash balances decreased to EUR 15.2 billion (EUR 21.8 billion), while loans and advances to credit institutions increased to EUR 20.0 billion (EUR 9.1 billion). Loans and advances to customers rose to EUR 148.3 billion (+6.3%; EUR 139.5 billion). On the liability side, deposits from banks increased to EUR 19.1 billion (EUR 16.3 billion) and customer deposits grew again – most notably in Austria, the Czech Republic and Slovakia – to EUR 159.8 billion (+5.9%; EUR 151.0 billion). The loan-to-deposit ratio stood at 92.8% (92.4%).

OUTLOOK

Operating environment anticipated to be conducive to credit expansion. Real GDP growth is expected to be approximately between 3% and 4% in Erste Group’s CEE core markets, including Austria, in 2018. It should primarily be driven by solid domestic demand, as real wage growth and declining unemployment should support economic activity in CEE. 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 12% in 2018 (based on average tangible equity in 2018). The underlying assumptions are growing revenues (assuming 5%+ net loan growth and interest rate hikes in the Czech Republic and Romania) and flat expenses with risk costs remaining at historically low levels.

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.
 

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