Erste Group Bank, emerging Europe’s second-biggest lender, said it would lose up to €800-million ($1-billion) this year and not pay a dividend after taking hits on foreign currency loans in Hungary and eurozone sovereign debt.
The Austrian bank’s shares were down 13% at €18.01 by 12.15pm GMT on Monday, compared with a 0.1% higher European banking sector .
“This is clearly disappointing news. In our view, today’s announcement is likely to trigger a cycle of ratings downgrades and renew concerns over capital in the light of worsening operation environment in eastern Europe,” GFI Research said.
Chief executive Andreas Treichl said Erste’s core tier one capital ratio, a key measure of banks’ financial strength, would end the year at 9.2% of risk-weighted assets, steady versus the end of 2010.
He said Erste had not been approached by regulators about joining a European push to recapitalise banks, nor did he believe Erste would have to take part in such an exercise.
Kitchen sink approach
Erste scaled back and marked down to market values nearly all its exposure to the sovereign debt of struggling eurozone countries, changed the way it handles credit default swaps, and took big writedowns in Hungary and Romania.
The kitchen-sink approach and volatility on financial markets means Erste will delay for at least a year repaying €1.2-billion in non-voting capital which it got from Austria during the 2008 global banking crisis and skip a 2011 dividend.
The market had expected 2011 net profit of €967-million and a dividend of 70c per share, according to Thomson Reuters data.
Erste cut its sovereign exposure to Greece, Portugal, Spain, Ireland and Italy to €648-million as of the end of September and marked 95% of this down to market values.
That left its combined exposure to Greece and Portugal state debt at only €10-million.
But it faces a €500-million loss at its Hungarian unit, — which will now get up to about €600-million of new equity — following Hungary’s move to let domestic borrowers repay foreign-currency loans at below market rates.
It will write down its entire €312-million in Hungary-related goodwill and boost risk provisions there by €450-million, while fighting the new law. Treichl said Erste had ruled out prospects of quitting Hungary despite the upheaval.
‘Clear and decisive decisions’
Austrian peer Raiffeisen Bank International also plans to inject capital into its Hungarian unit as a result of the controversial law, its finance chief was quoted as saying last week.
Raiffeisen, whose shares fell 7%, had no comment on Erste’s moves.
Erste said slower-than-expected economic recovery in Romania meant it would have a €700-million pretax writedown of goodwill this year, leaving €1.1-billion in goodwill. It will inject €100-million of equity to the Romanian unit, Treichl said.
Treichl said his position as CEO was secure despite the problems in Hungary and Romania, two key planks of his central Europe expansion strategy that he said remained intact.
He said Erste had no choice but to take drastic action on its balance sheet given the environment in those two countries and the eurozone debt crisis.
“We have scant hope that there could be clear and decisive decisions soon on the future of Europe,” he said. — Reuters