Erste Group Bank: Preliminary results 2019

Net profit of EUR 1,470.1 million in 2019 (ROTE: 11.2%); dividend proposal of EUR 1.5 per share

Vienna (pta007/28.02.2020/07:30 UTC+1) Excerpt - Highlights & outlook
For performance in detail, financial results - QoQ comparison, balance sheet develoment, segment reporting and additional financial data tables see enclosed pdf

HIGHLIGHTS
P&L 2019 compared with 2018; balance sheet as of 31 December 2019 compared with 31 December 2018

Net interest income increased - mainly in the Czech Republic, but also in Romania and Hungary - to EUR 4,746.8 million (+3.6%; EUR 4,582.0 million). Net fee and commission income rose to EUR 2,000.1 million (+4.8%; EUR 1,908.4 million), driven mainly by higher payment fees, insurance brokerage fees and asset management fees. While net trading result improved significantly to EUR 318.3 million (EUR 1.7 million), the line item gains/losses from financial instruments measured at fair value through profit or loss declined to EUR 24.5 million (EUR 195.4 million). The development of both line items was driven by valuation effects due to market interest rate volatility. Operating income increased to EUR 7,255.9 million (+4.9%; EUR 6,915.6 million). The increase in general administrative expenses to EUR 4,283.3 million (+2.4%; EUR 4,181.1 million) was mainly attributable to a rise in personnel expenses to EUR 2,537.1 million (+2.5%; EUR 2,474.2 million). Payments to deposit insurance systems included in other administrative expenses rose to EUR 104.8 million (EUR 88.6 million). The increase in amortisation and depreciation to EUR 541.0 million (EUR 472.0 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 2,972.7 million (+8.7%; EUR 2,734.6 million) and the cost/income ratio improved to 59.0% (60.5%).

Due to net allocations in Austria and Slovakia in both the retail and the corporate segments, the impairment result from financial instruments amounted to EUR 39.2 million or, adjusted for net allocations to provisions for commitments and guarantees given, 7 basis points of average gross customer loans (net releases of EUR 59.3 million or 3 basis points). Positive effects came from substantial income from the recovery of loans already written off, primarily in the Czech Republic, Hungary and Romania, as well as from releases of provisions for commitments and guarantees given in Austria, the Czech Republic and Romania. The NPL ratio based on gross customer loans improved again to 2.5% (3.2%), the NPL coverage ratio to 77.1% (73.4%).

Other operating result amounted to EUR -628.2 million (EUR 304.5 million). The deterioration is attributable to a provision in the amount of EUR 153.3 million set aside for losses expected from a supreme court decision concerning the business activities of a Romanian subsidiary as well as goodwill impairment in Slovakia in the amount of EUR 165.0 million. The expenses for the annual contributions to resolution funds included in this line item rose - in particular in the Czech Republic - to EUR 75.3 million (EUR 70.3 million). Levies on banking activities increased to EUR 128.0 million (EUR 112.2 million), including a EUR 11.0 million banking tax payable in Romania for the first time in the reporting year.

The minority charge rose due to significantly better results from the savings banks to EUR 440.9 million (EUR 369.1 million). The net result attributable to owners of the parent declined to EUR 1,470.1 million ( 18.0%; EUR 1,793.4 million) due to the one-off effects.

Total equity not including AT1 instruments rose to EUR 19.0 billion (EUR 17.9 billion). After regulatory deductions and filtering in accordance with CRR, common equity tier 1 capital (CET1, CRR final) amounted to EUR 16.3 billion (+4.9%; EUR 15.5 billion), total own funds (CRR final) to EUR 22.0 billion (EUR 20.9 billion). Total risk (risk-weighted assets including credit, market and operational risk, CRR final) rose to EUR 118.6 billion (EUR 115.4 billion). The common equity tier 1 ratio (CET 1, CRR final) stood at 13.7% (13.5%), the total capital ratio at 18.5% (18.1%).

Total assets rose to EUR 245.7 billion (EUR 236.8 billion). On the asset side, cash and cash balances decreased substantially to EUR 10.7 billion (EUR 17.5 billion), while loans and advances to credit institutions increased to EUR 23.1 billion (EUR 19.1 billion). On the back of continuing loan growth in all core markets, loans and advances to customers rose to EUR 160.3 billion (+7.3%; EUR 149.3 billion). On the liability side, deposits from banks declined to EUR 13.1 billion (EUR 17.7 billion) while customer deposits increased again markedly - across all Erste Group markets - to EUR 173.8 billion (+6.9%; EUR 162.6 billion). The loan-to-deposit ratio stood at 92.2% (91.8%).

OUTLOOK

Erste Group targets a return on tangible equity (ROTE) of above 10% in 2020. The expected positive, albeit moderating, macro-economic development in the core markets Czech Republic, Slovakia, Hungary, Romania, Croatia, Serbia and Austria as well as an improvement in other operating result that was negatively impacted by one-off effects in 2019 should be supportive factors to achieve this target. On the other hand, a global or regional slowdown of economic growth as well as potential - and as yet unquantifiable - political or regulatory risks might jeopardize achieving the target.

In 2020, the positive development of the economy should be reflected in growth rates (real GDP growth) of 2% to 4% in Erste Group's CEE core markets. All other economic parameters are currently expected to be similarly ro-bust. Unemployment rates should remain at historic lows - in the Czech Republic and in Hungary they are already among the lowest in the EU. Inflation is forecast to remain broadly stable. Strong competitive positions should again lead to current account surpluses in most countries. The fiscal situation and public debt levels are also pro-jected to remain sound. Austria should see continued dynamic economic growth at a rate of 1.3%. Overall, growth continues to be driven by domestic demand across all economies. The contribution of exports is forecast as neu-tral.

Against this backdrop, Erste Group expects mid-single digit net loan growth. Despite negative interest rates in the euro zone but supported by moderately increasing short term market rates in Czech Republic and Hungary net interest income should thus increase further in 2020. The second key income component, net fee and commission income, is also expected to rise. As in 2019, some positive momentum should again come from asset management, insurance brokerage and payment services. Most of the other income components are expected to remain stable, by and large. Considering the good performance in 2019, net trading and fair value results are expected to be lower. Overall, operating income should continue to grow in 2020. Operating expenses are expected to rise in 2020, partly due to anticipated further wage increases in all core markets of Erste Group. However, Erste Group will continue to invest in IT and thereby its future competitiveness in 2020. The focus will be on progressive IT modernisation, back office digitalisation as well as the group-wide implementation and expansion of the digital plat-form George. The roll-out of George will continue in Hungary and Croatia in 2020. Positive jaws is the ambition for 2020, even though it will be tougher to achieve than in 2019 as revenue pressures increase. Overall, the operating result is projected to rise in 2020.

Risk costs should remain low in 2020 on the back of the low interest rate environment. While precise forecasts are difficult in the current environment, Erste Group projects for 2020 risk costs of below 20 basis points of average gross customer loans. The solid, albeit slowing, macro environment should support asset quality as will the well-balanced diversified loan portfolio.

We do expect an improvement in other operating result due to the non-recurrence of the significant one-off negative effects of 2019. Assuming a tax rate of below 20% and a similar high level of minority charges, Erste Group aims to achieve a return on tangible equity (ROTE) of above 10%.

Potential risks to the guidance are interest rate trends that differ from expectations, political or regulatory measures targeting banks, geopolitical and global economic developments as well as potential negative economic effects from the spreading of the corona virus.

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Emitter:	Erste Group Bank Am Belvedere 1 1100 Wien Austria
Contact Person:	Thomas Sommerauer/ Simone Pilz
Phone:	+43 (0)5 0100 - 17326
E-Mail:	thomas.sommerauer@erstegroup.com
Website:	www.erstegroup.com
ISIN(s):	AT0000652011 (Share)
Stock Exchange(s):	Vienna Stock Exchange (Official Trade)
Other Stock Exchanges:	Bucharest Stock Exchange, Prague Stock Exchange