Erste Group Bank AG: Erste Group Update - 2016 EU‐Wide Stress Test Results

Vienna (pta018/29.07.2016/22:05 UTC+2) Erste Group Bank AG (Erste Group) was subject to the 2016 EU-wide stress test conducted by the European Banking Authority (EBA), in cooperation with the European Central Bank (ECB), the European Commission (EC) and the European Systemic Risk Board (ESRB).

Erste Group notes the announcements made today by the EBA on the EU-wide stress test and fully acknowledges the outcomes of this exercise.

The 2016 EU-wide stress test does not contain a pass fail threshold and instead is designed to be used as a crucial piece of information for the supervisory review process in 2016. The results will thus allow competent authorities to assess Erste Group's ability to meet applicable minimum and additional own funds requirements under stressed scenarios based on a common methodology and assumptions.

The adverse stress test scenario was set by the ECB/ESRB and covers a three-year time horizon (2016-2018). The stress test has been carried out applying a static balance sheet assumption as at December 2015, and therefore does not take into account future business strategies and management actions. It is not a forecast of Erste Group profits.

Erste Group comments on stress test results

The EBA has today published the results of the 2016 stress test. The application of the adverse scenario resulted in a phased-in CET 1 ratio of 8.2% (year-end 2018) in the case of Erste Group versus a starting point of 12.3% at the end of 2015. In total, the stress-induced change amounted to -416 bps. This compares to a change of -233bps in the 2014 EBA stress test and resulted in a higher phased-in CET1 ratio of 8.9% at the end of the forecast period.

The assumptions underlying the adverse scenario of the stress test include (cumulative impact over forecast period of 2016 to 2018 vs assumed starting values for 2015):
* Decline in real GDP of 1.8% in the European Union (decline of up to 4.2% in Erste Group's CEE markets)
* Decline in residential property prices of 10.9% in the European Union (decline of up to 20.5% in Erste Group's CEE markets)
* Rise in short- and long-term interest rates. 3M Euribor: +30bps, 10y government bond: +110bps on average in the European Union (increase of up to 190bps in Erste Group's CEE markets). Assumed asymmetric impact on asset vs liability side, i.e. full re-pricing of liabilities but limited re-pricing of assets
* Depreciation of Erste Group relevant CEE currencies by 8.0% to 23.2% vs EUR, and appreciation of 22.8% of CHF vs EUR
* Stable balance sheet assumption (frozen at 2015 levels)

The main drivers underlying the EBA adverse scenario stress test result are as follows (cumulative impacts over the forecast period of 2016 to 2018 vs 2015 actuals):
* A reduction in net interest income (NII) by about EUR 3.3bn, or, on average, by EUR 1.1bn or about 25% from 2016 onwards as compared to 2015 reported NII. In the 2014 EBA stress test the cumulative stress on net interest income was estimated at EUR 1.6bn. The 2016 estimation is attributable to:
o EUR 1.6bn NII decline (cumulative, 2016-18), due to re-pricing effects from higher interest rates, assuming broadly stable interest income but a doubling of interest expense throughout the forecast period, compared to 2015 actuals.
o EUR 1.7bn NII decline (cumulative, 2016-18) due to assumed severe asset quality deterioration (~75%) and non-recognition of incremental unwinding effect (~25%). NPL stock is expected to rise to EUR 15.7bn, resulting in an NPL ratio of 11.9% by the end of the forecast period (2018). This contrasts with the historic peak in NPL volume in June 2013 of EUR 12.6bn (NPL ratio of 9.7%), in the wake of severe asset quality stress in Romania and Hungary, and Q1 16 NPL stock of EUR 8.9bn (NPL ratio of 6.7%). About 45% of the projected NII decline is attributable to Austria.
* An increase in risk costs (loan loss provisions), resulting in risk costs of EUR 4.8bn throughout the 2016-18 forecast period. This contrasts with risk costs of EUR 0.7bn and EUR 25m in 2015 and H1 16, respectively, following an extensive clean-up exercise in 2014 and a number of successful "in line with marks"-NPL sales.

The adverse scenario of the 2016 EBA stress test projects Erste Group to be significantly loss-making throughout the 2016-18 forecast period.

Erste Group confirms its guidance, last updated on 14 July 2016: it expects ROTE to exceed 12% in 2016, including a buffer for potential banking tax one-off payment in Austria in 2016.

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Emitter:	Erste Group Bank AG Am Belvedere 1 1100 Wien Austria
Contact Person:	Thomas Sommerauer / Gerald Krames
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