Erste Group Bank: Preliminary results 2016, guidance for 2017 confirmed

Net profit of EUR 1,264.7 million in 2016 (ROTE: 12.3%)

Vienna (pta006/28.02.2017/07:00 UTC+1) HIGHLIGHTS
P&L 2016 compared with 2015; balance sheet 31 December 2016 compared with 31 December 2015

Net interest income declined to EUR 4,374.5 million (-1.6%; EUR 4,444.7 million), mainly due to a market envi-ronment of persistently low interest rates and large-scale NPL reductions. This development was not fully offset by lending growth. Net fee and commission income decreased to EUR 1,783.0 million (-4.2%; EUR 1,861.8 million) reflecting a decline in income from lending business and payment services as well as lower income from the securities business. Net trading and fair value result rose to EUR 272.3 million (+29.6%; EUR 210.1 mil-lion). Consequently, operating income declined to EUR 6,691.2 million (-1.2%; EUR 6,771.8 million). General administrative expenses increased to EUR 4,028.2 million (+4.1%; EUR 3,868.9 million), driven mainly by higher IT and consultancy costs as well as a rise in personnel expenses to EUR 2,339.3 million (+4.2%; EUR 2,244.6 million). This resulted in a decline of the operating result to EUR 2,663.0 million (-8.3%; EUR 2,902.9 million). The cost/income ratio stood at 60.2% (57.1%). Result from financial assets and liabilities not measured at fair value through profit and loss (net) include a gain, posted in the second quarter, from the sale of shares in VISA Europe in the amount of EUR 138.7 million.

Net impairment loss on financial assets declined substantially to EUR 195.7 million or 15 basis points of aver-age gross customer loans (-73.2%; EUR 729.1 million or 56 basis points), on the back of a significant decline of non-performing loans and higher income from the recovery of loans already written off in Romania and Hungary. The NPL ratio improved significantly to 4.9% (7.1%). The NPL coverage ratio increased markedly to 69.1% (64.5%).

Other operating result amounted to EUR -665.0 million (EUR -635.6 million). This includes expenses for the annual contributions to resolution funds in the amount of EUR 65.6 million (EUR 51.3 million). Banking and fi-nancial transaction taxes amounted to EUR 388.8 million (EUR 236.2 million). This rise was attributable to a one-off payment of banking tax pursuant to the Austrian Bank Tax Act (Stabilitätsabgabegesetz) in the amount of EUR 200.9 million preceding a significant reduction of future annual banking tax payments in Austria. Overall, banking levies in Austria amounted EUR 306.7 million (EUR 128.6 million). In Hungary, banking levies declined significantly to EUR 57.0 million (EUR 84.0 million) and in Slovakia amounted to EUR 25.1 million (EUR 23.6 million).

As the earnings contributions of savings banks covered by the cross-guarantee system declined slightly from historically very high levels, the minority charge decreased to EUR 272.0 million (-11.4%; EUR 307.0 million). The net result attributable to owners of the parent rose to EUR 1,264.7 million (+30.6%; EUR 968.2 million).

Total equity - adjusted for additional tier 1 capital - increased to EUR 16.1 billion (EUR 14.8 billion). After regu-latory deductions and filtering according to the CRR, common equity tier 1 capital (CET1, Basel 3 phased-in) rose to EUR 13.6 billion (EUR 12.1 billion); total eligible own funds (Basel 3 phased in) amounted to EUR 18.8 billion (EUR 17.6 billion). Total risk, i.e. risk-weighted assets including credit, market and operational risk (Basel 3 phased-in) rose to EUR 101.8 billion (EUR 98.3 billion). The common equity tier 1 ratio (CET 1, Basel 3 phased-in) stood at 13.4% (12.3%), the total capital ratio (Basel 3 phased-in) at 18.5% (17.9%).

Total assets increased to EUR 208.2 billion (EUR 199.7 billion), driven mainly by an increase in cash and cash balances, including in particular cash balances at central banks, to EUR 18.4 billion (EUR 12.4 billion). Loans and receivables to customers (net) rose to EUR 130.7 billion (+3.8%; EUR 125.9 billion). Securities held for trading declined to EUR 8.0 billion (EUR 8.7 billion). On the liability side, customer deposits grew substantially - particularly in the Czech Republic, Austria and Romania - to EUR 138.0 billion (+7.9%; EUR 127.9 billion). Deposits from banks were higher at EUR 14.6 billion (+3.0%; EUR 14.2 billion). Debt securities in issue, mainly bonds and mortgage covered bonds, declined to EUR 27.2 billion (-8.3%; EUR 29.7 billion). The loan-to-deposit ratio stood at 94.7% (98.4%).

OUTLOOK

Erste Group expects a return on tangible equity (ROTE) of more than 10% in 2017. The anticipated solid macro-economic development in the core markets Czech Republic, Slovakia, Hungary, Romania, Croatia, Serbia and Austria, the unchanged very positive assessment of the bank's risk profile and the significant reduction of banking tax in Austria should be supportive factors to achieve this target. On the other hand, the persistent low interest rate environment, the non-recurrence of one-off effects such as the sale of VISA shares and potential - and as yet unquantifiable - political risks might jeopardize it.

In 2017, the positive development of the economy should be reflected in growth rates (real GDP growth) between 1.5-4.5% in Erste Group's CEE core markets. All other economic parameters are currently expected to develop likewise robustly. Unemployment rates should decline further - in the Czech Republic and in Hungary they are already among the lowest in the EU. Inflation is forecast to remain low and strong competitive positions should again lead to current account surpluses. The fiscal situation and public debt levels are also projected to remain sound. In Austria, by contrast, growth is forecast to be less dynamic, at a rate of 1.5%. Unemployment is expected to stabilise in 2017 after rising in 2016. Overall, growth continues to be driven by domestic demand across all economies, even though exports are expected to make a positive contribution to growth in most countries.

Against this backdrop, Erste Group expects mid-single digit net loan growth which is required to offset margin pressure resulting from sovereign bond reinvestments in the ongoing low interest rate environment. The strong improvement in asset quality also has an adverse impact on net interest income. With every further reduction of the NPL portfolio - driven, on the one hand, by NPL sales but also by the improved portfolio quality - net interest income will decline on the back of the lower unwinding effect. Overall, Erste Group expects that, at best, it will be able to keep net interest income stable in 2017. If the interest rate environment remains unchanged, a slight decline might also be possible, though.

The second key income component, net fee and commission income, is expected to remain at about the same level in 2017 as in the previous year. Some positive momentum should come from the anticipated rising loan demand and the dynamic economic environment. After a weak year in 2016, the securities business should also pick up again. The other income components are expected to remain flat, by and large, despite the volatility of the net trading and fair value result. Operating income should hence remain stable in 2017 or decline marginally in the case of lower-than-expected loan growth.

Operating expenses are expected to rise by 1-2% in 2017. This cost inflation will be mainly driven by IT invest-ments necessary to secure Erste Group's future competitiveness and measures induced by regulatory require-ments. Further investments in product simplification, process standardisation or the group-wide implementation of the digital platform George underline the digital strategy. After its rollout in Austria, George will be launched in the Czech Republic, in Slovakia and Romania in 2017. Additional cost drivers are regulatory expenses related for example to the implementation of IFRS 9 from the beginning of 2018 or to preparations for AnaCredit, a Europe-wide bank loans dataset overseen by the ECB. The operating result is therefore projected to slightly decline in 2017.

Risk costs should again support net profit in 2017. While the low interest rate environment has a negative impact on net interest income, it does have a positive effect on risk costs which, unlike net interest income, benefit additionally from the reduction of NPLs. Erste Group, however, does not expect a recurrence of the historically low risk cost level of the year 2016 of just 15 basis points of average customer loans. While precise forecasts are difficult in the current environment, Erste Group projects for 2017 risk costs of about 30 basis points of average customer loans.

Other result is anticipated to develop positively. Even though the one-off effects of the sale of VISA shares will not recur, banking tax in Austria is set to decrease significantly after the one-off payment of EUR 200.9 million to the Innovation Fund in 2016. As a result, this line item will improve barring the occurrence of any unforeseen events.

Assuming a similar tax rate as in 2016 and a similar level of minority charges, Erste Group aims to achieve a return on tangible equity (ROTE) of more than 10%.
Potential risks to the guidance are the impact from expansionary monetary central bank policies including nega-tive interest rates, political risks e.g. related to various elections in key EU economies, geopolitical risks and global economic risks or consumer protection initiatives.

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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