Erste Group Bank: Preliminary results 2018

Net profit of EUR 1,793.4 million (ROTE: 15.2%); proposes dividend of EUR 1.4 per share

Vienna (pta008/28.02.2019/07:30 UTC+1) HIGHLIGHTS
P&L 2018 compared with 2017; balance sheet as of 31 December 2018 compared with 31 December 2017

Net interest income increased - mainly in the Czech Republic and in Romania, but also in Austria - to EUR 4,582.0 million (+5.3%; EUR 4,353.2 million). Net fee and commission income rose to EUR 1,908.4 million (+3.1%; EUR 1,851.6 million), primarily on the back of significantly higher income from payment services and asset management. While net trading result was down at EUR -1.7 million (EUR 222.8 million), the line item gains/losses from financial instruments measured at fair value through profit or loss improved to EUR 195.4 million (EUR -12.3 million). Operating income rose to EUR 6,915.6 million (+3.7%; EUR 6,669.0 million). General administrative expenses were nearly stable at EUR 4,181.1 million (+0.5%; EUR 4,158.2 million). This was mostly attributable to the reduction of other administrative expenses to EUR 1,234.9 million (-5.7%; EUR 1,309.6 million). Payments to deposit insurance systems included in this line item amounted to EUR 88.6 million (EUR 82.8 million). This reduction almost fully compensated the rise in personnel expenses to EUR 2,474.2 million (+3.6%; EUR 2,388.6 million) and in depreciation and amortisation (+2.6%). Overall, the operating result improved to EUR 2,734.6 million (+8.9%; EUR 2,510.8 million) and the cost/income ratio to 60.5% (62.4%).

The impairment result from financial instruments amounted to EUR 59.3 million due to net releases on the back of improved asset quality or, adjusted for net allocation of provisions for commitments and financial guarantees given, -14 basis points of average gross customer loans (net allocations of EUR 132.0 million or 9 basis points). 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 3.2% (4.0%), the NPL coverage ratio to 73.0% (68.8%).

Other operating result improved to EUR -304.5 million (EUR -457.4 million). It included expenses for the annual contributions to resolution funds in the amount of EUR 70.3 million (EUR 65.8 million). Banking and transaction taxes increased to EUR 112.2 million (EUR 105.7 million. Other taxes were positive at EUR 1.0 million (EUR -37.7 million) due to one-off effects. In the financial year 2017, 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.

Taxes on income decreased significantly to EUR 332.4 million (EUR 410.1 million) as deferred tax assets were recognised, resulting in deferred tax income. The minority charge increased to EUR 369.1 million (+5.0%; EUR 351.5 million). The net result attributable to owners of the parent rose to EUR 1,793.4 million (+36.3%; EUR 1.316.2 million).

Total equity not including AT1 instruments rose to EUR 17.9 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 bil-lion. After regulatory deductions and filtering in accordance with CRR, common equity tier 1 capital (CET1, Basel 3 phased-in) amounted to EUR 15.5 billion (+5.3%; EUR 14.7 billion), total own funds (Basel 3 phased in) to EUR 20.9 billion (EUR 20.3 billion). Total risk (risk-weighted assets including credit, market and operational risk, Basel 3 phased-in) rose to EUR 114.6 billion (EUR 110.0 billion). The common equity tier 1 ratio (CET 1, Basel 3 phased-in) stood at 13.5% (13.4%), the total capital ratio (Basel 3 phased-in) at 18.2% (18.5%).

Total assets were up at EUR 236.8 billion (+7.3%; EUR 220.7 billion). On the asset side, cash and cash balanc-es decreased to EUR 17.5 billion (EUR 21.8 billion), while loans and advances to credit institutions increased to EUR 19.1 billion (EUR 9.1 billion). Loans and advances to customers rose to EUR 149.3 billion (+7.0%; EUR 139.5 billion). On the liability side, deposits from banks increased to EUR 17.7 billion (EUR 16.3 billion) and customer deposits grew again - in all core markets - to EUR 162.6 billion (+7.7%; EUR 151.0 billion). The loan-to-deposit ratio stood at 91.8% (92.4%).

OUTLOOK

Erste Group targets a return on tangible equity (ROTE) of above 11% in 2019. The expected solid macro-economic development in the core markets Czech Republic, Slovakia, Hungary, Romania, Croatia, Serbia and Austria, compared to 2018 only moderately rising interest rate levels in several of our markets and still historically low risk costs 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 2019, the positive development of the economy should be reflected in growth rates (real GDP growth) of around 3% in Erste Group's CEE core markets. All other economic parameters are currently expected to be similarly robust. 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 projected to remain sound. Austria should see continued dynamic economic growth at a rate of above 2%. Overall, growth continues to be driven by domestic demand across all economies. The contribution of exports is forecast as neutral.

Against this backdrop, Erste Group expects mid-single digit net loan growth. Net interest income should thus increase further in 2019. The second key income component, net fee and commission income, is also expected to rise moderately. As in 2018, some positive momentum should again come from fund management and payment services. The other income components are expected to remain stable, by and large, despite the volatility of the net trading and fair value results. Consequently, operating income should continue to grow in 2019. Operating expenses are expected to rise in 2019, albeit not to the same extent as operating income, mostly due to anticipated further wage increases in all core markets of Erste Group. However, Erste Group will continue to invest in digitalisation and thereby its future competitiveness in 2019. The focus will be on product simplification, process standardisation as well as the group-wide implementation and expansion of the digital platform George. The roll-out of George will continue in Hungary and Croatia in 2019. Overall, the operating result is projected to rise in 2019.

Risk costs should remain low in 2019. Amid a stable low interest rate environment, risk costs should go up only slightly. Further improvements in asset quality, however, should have a dampening effect. Overall, Erste Group does not expect a recurrence of the historically low risk cost level of 2018 of -14 basis points of average gross customer loans. While precise forecasts are difficult in the current environment, Erste Group projects for 2019 risk costs of 10 to 20 basis points of average gross customer loans.

The Romanian banking tax will have a negative impact on other operating result in 2019, even though the magnitude remains as yet unclear.

Assuming a tax rate of below 20% and a similar level of minority charges, Erste Group aims to achieve a return on tangible equity (ROTE) of above 11%.

Due to its limited presence in the United Kingdom, Erste Group does not anticipate any material impact from Brexit at the current time.

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

Further Information in pdf-file:
Financial data (table)
Performance in detail
Financial results - QoQ comparison
Development of the balance sheet
Segment reporting
Info regarding presentation of results via audio webcast and telephone conference
Appendix - tables

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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