Delivering shareholder returns by eliminating legacy issues
Gernot Mittendorfer, CFO, Erste GroupThomas Sommerauer, Head of IR, Erste Group Simone Pilz, IR Manager, Erste Group
London, 1-2 October 2014
Bank of America Merrill Lynch Banking Conference
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Disclaimer –
Cautionary note regarding forward-looking statements
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• THE INFORMATION CONTAINED IN THIS DOCUMENT HAS NOT BEEN INDEPENDENTLY VERIFIED AND NO REPRESENTATION OR WARRANTY EXPRESSED OR IMPLIED IS MADE AS TO, AND NO RELIANCE SHOULD BE PLACED ON, THE FAIRNESS, ACCURACY, COMPLETENESS OR CORRECTNESS OF THIS INFORMATION OR OPINIONS CONTAINED HEREIN.
• CERTAIN STATEMENTS CONTAINED IN THIS DOCUMENT MAY BE STATEMENTS OF FUTURE EXPECTATIONS AND OTHER FORWARD-LOOKING STATEMENTS THAT ARE BASED ON
MANAGEMENT’S CURRENT VIEWS AND ASSUMPTIONS AND INVOLVE KNOWN AND UNKNOWN RISKS AND UNCERTAINTIES THAT COULD CAUSE ACTUAL RESULTS, PERFORMANCE OR EVENTS TO
DIFFER MATERIALLY FROM THOSE EXPRESSED OR IMPLIED IN SUCH STATEMENTS.
• NONE OF ERSTE GROUP OR ANY OF ITS AFFILIATES, ADVISORS OR REPRESENTATIVES SHALL HAVE ANY LIABILITY WHATSOEVER (IN NEGLIGENCE OR OTHERWISE) FOR ANY LOSS HOWSOEVER
ARISING FROM ANY USE OF THIS DOCUMENT OR ITS CONTENT OR OTHERWISE ARISING IN CONNECTION WITH THIS DOCUMENT.
• THIS DOCUMENT DOES NOT CONSTITUTE AN OFFER OR INVITATION TO PURCHASE OR SUBSCRIBE FOR ANY SHARES AND NEITHER IT NOR ANY PART OF IT SHALL FORM THE BASIS OF OR BE RELIED UPON IN CONNECTION WITH ANY CONTRACT OR COMMITMENT WHATSOEVER.
Presentation topics
• Footprint & business environment
• Challenges for banks
• Eliminating legacy issues
• Outlook
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• Consistent business strategy focused upon real economy ever since foundation in 1819
• Relationship approach
• Leading retail and corporate bank in 7 geographically connected countries
• Favourable mix of mature & emerging markets with low penetration rates
• Potential for cross selling and organic growth in CEE
Footprint –
Customer banking in Austria and the eastern part of the EU
Erste Group footprint Highlights
4 Direct presence Indirect presence Customers : 0.9m Hungary Employees : 2,809 Branches: 128 Customers : 3.1m Romania Employees : 7,078 Branches: 551 Customers : 0.3m Serbia Employees : 988 Branches: 67 Customers : 1.1m Croatia Employees : 2,752 Branches: 160 Customers: 5.2m Czech Republic Employees : 10,474 Branches : 644 Customers: 2.4m Slovakia Employees : 4,228 Branches: 293 Customers: 3.4m Austria Employees: 15,658 Branches: 966
Business environment –
Visible macroeconomic improvement across the CEE region
Real GDP growth (in %) Dom. demand contribution* (in %) Net export contribution* (in %)
Unemployment rate (eop, in %) Current account balance (% of GDP) Gen gov balance (% of GDP)
Consumer price inflation (ave, in %)
Public debt (% of GDP) • CEE economies grew faster than the euro zone in Q2 2014 (euro zone GDP grew by 0.7% yoy in Q2)
• Positive outlook for 2014 supported by Q2 GDP data: AT (+0.1%), CZ (+2.7%), RO (+1.2%), SK (+2.5%), HU (+3.9%)
• 2014 GDP yoy estimates improved for most of CEE countries as economies remained driven by exports with visible improvement in domestic demand
• Solid public finances across Erste Group‘s core markets recognised by Moody‘s: Romania upgraded to investment grade (BBB-) in May 14 • Sustainable current account balances, supported by competitive economies; Hungary has announced new austerity package
HR -1.3 -1.3 HU 3.0 0.7 RO 1.6 -0.9 SK 1.5 -0.8 CZ 2.5 -0.7 AT 1.1 -1.0 2014 2013 HR -0.5 -0.9 HU 3.3 1.1 RO 2.3 3.5 SK 2.2 0.9 CZ 2.5 -0.9 AT 1.0 0.3 HR 0.2 2.3 HU 0.1 1.7 RO 1.3 4.0 SK 0.3 1.4 CZ 0.5 1.4 AT 1.7 2.1 HR 18.0 17.3 HU 8.8 10.2 RO 7.2 7.2 SK 13.9 14.2 CZ 7.5 7.5 AT 4.9 4.9 HR 1.8 1.3 HU 2.6 3.0 RO -1.2 -1.1 SK 2.9 2.1 CZ 0.0 -1.5 AT 3.3 2.7 -2.4 RO -2.5 -2.3 SK -2.5 -2.8 CZ -1.7 -1.4 AT -2.7 -1.5 HR -5.6 -6.5 HU -2.9 67 79 39 55 46 75 80 72 39 56 45 82 HR HU RO SK CZ AT
* Contribution to real GDP growth. Domestic demand contribution includes inventory change. Source: Erste Group Research, EU Spring Economic Forecast 2014.
SK -0.3 RO 4.4 0.4 HR AT 0.6 CZ 1.6 0.7 HU 1.2 0.4 0.7 0.0 0.3 0.8
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Business environment –
Historic low interest rate environment poses challenges
Austria6
Czech Republic Romania
Slovakia Hungary Croatia
• ECB cut discount rate to 0.05% in Sept 14 • Maintains expansionary monetary policy
stance
• National bank maintains ultra-low interest rates since November 2012 at 0.05%
• Central bank cut policy rate to historic low of 3.25% in August 2014
• As part of euro zone ECB rates are applicable in SK
• National bank concluded easing cycle on 22 July 2014 after cutting base rate to historic low of 2.1%
• Central bank maintains discount rate at 7.0% since mid-2011 1-6 14 1.83% 0.30% 1-6 13 1.82% 0.21% 10YR GOV 3M Interbank 1-6 14 2.00% 0.37% 1-6 13 1.86% 0.48% 1-6 14 5.10% 2.60% 1-6 13 5.53% 4.79% 1-6 14 2.31% 0.30% 1-6 13 2.47% 0.21% 1-6 14 5.42% 2.68% 1-6 13 5.92% 5.00% 1-6 14 0.64% 1-6 13 1.07% Q2 14 1.68% 0.30% Q1 14 1.98% 0.30% Q2 14 1.73% 0.36% Q1 14 2.27% 0.37% Q2 14 4.84% 2.54% Q1 14 5.36% 2.66% Q2 14 2.24% 0.30% Q1 14 2.38% 0.30% Q2 14 5.03% 2.54% Q1 14 5.80% 2.82% Q2 14 0.62% Q1 14 0.65% Source: Bloomberg.
Presentation topics
• Footprint & business environment
• Challenges for banks
• Eliminating legacy issues
• Outlook
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Challenges for banks –
Meeting the demands of investors, regulators and customers
• Regulators
• ECB vs EBA vs national regulators
• Basel 3/ CRD IV, CRR: CET1, LCR, NSFR
• Resolution regime, European deposit insurance
• Stress tests: data collection
• Regulatory compliance is costly
• Investors
• Sustainable ROE above cost of capital (increased due to regulatory demands)
• Delivering on business model
• Cost discipline
• Risk costs
• Customers
• Easy to understand products designed to meet customer needs: “solutions instead of product push”
• Transition between channels: digital banking, new type of branches
• New competition e.g. mobile banking via non-bank payment service providers
• Consumer protection, transparency
Presentation topics
• Footprint & business environment
• Challenges for banks
• Eliminating legacy issues
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Eliminating legacy issues –
2014 expected to be final year of one-offs related to pre-crisis issues
One-offs with effect on regulatory capital
• Additional risk provisions of about EUR 400m in Romania
• EUR 80m booked in H1 14; bulk expected to occur in H2 14 as LGD recalibration under way and uncertainty about pricing of NPL sales
• Booked in risk costs of SME and CRE segments (BL) and Romania segment (geo)
• Hungary: consumer loan law (bid-/ask-spread, unilateral interest and fee changes) impact of EUR350-400m
• EUR 130.3m in H1 14, remaining impact expected to occur in H2 14 • Booked in other operating result; booking could be reversed into risk
costs, depending on final legislative clarification (cash payback vs principal reduction)
• No clarity yet on potential additional losses in Hungary from FX loan conversion into HUF expected for year-end 2014; hence no provision included in Q2 14 figures
• Negative change in deferred taxes (net) of EUR 164.2m
• Minor impact of 4 and 13bps in fully-loaded and phased-in scenario • Accounting standard-induced booking, under Austrian tax regulation
tax losses can be carried forward indefinitely
One-offs with no effect on regulatory capital
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• Write-down of remaining goodwill, value of customer relationships, brand and other intangibles related to Romania
• Total impact of EUR 854.2m (cumulative)
• Booked in other operating result of Group Corporate Center (BL) and Other segment (geo)
• Full write-down of remaining goodwill related to Croatia and minor participations
• Total impact of EUR 101.8m
• Booked in other operating result of Group Corporate Center (BL) and Other segment (geo)
Eliminating legacy issues –
Significant reduction in intangibles to 13.8% of book value
Quarterly development of intangibles (EUR bn) Highlights
• Extraordinary intangible write-downs amounted to EUR 956.4m in Q2 14 • RO goodwill: EUR 319.1m
• RO customer relationships: EUR 176.1m • RO brand: EUR 294.6m
• RO other intangibles: EUR 64.4m • HR & related: EUR 101.8m
• CZ and SK goodwill are carried in EUR • No goodwill related to Hungary
• No goodwill related to Romania
• Reduced customer relationship amortisation expenses booked in operating costs of the Group Corporate Center
30/06/14 1.4 0.0 0.1 0.0 0.5 0.2 0.1 0.5 31/03/14 2.4 0.3 0.3 0.3 0.5 0.2 0.2 0.6 31/12/13 2.4 0.3 0.3 0.3 0.5 0.2 0.2 0.6 30/09/13 2.8 0.6 0.3 0.3 0.5 -41.1% 0.2 0.6 30/06/13 2.8 0.6 0.2 0.3 0.5 0.2 0.2 0.6 0.3 Customer relationships BCR goodwill Brand (mainly BCR) CZ goodwill SK goodwill Other goodwill Software
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Eliminating legacy issues –
Declining non-performing loans volume, declining NPL ratio
Business line view Geographic view
12 • Continued decline of group NPL volume and group NPL ratio on
supportive trends in CRE, LC (BL) and RO, HU (geo) • NPL sales amounted to EUR 134.9m in Q2 14
• Retail: EUR 50.5m • Corporate: EUR 84.4m
• Reallocation of about EUR 800m from SME to LC is key reason for rising NPL ratio in LC and decline in SME; underlying trends stable
• NPL sales mainly in HU (EUR 53.1m), leading to NPL decline in same amount; NPL ratio stable due to declining overall loan volume • NPL sales of EUR 41.8m in AT/OA (Holding, Immorent)
• Minor sales in CZ, SK, RO
• RO: First large volume NPL package of about EUR 240m sold in July 2014 and further significant NPL sales until YE 2014 expected
75 99 94 RS HR 1,242 1,212 1,283 HU 1,306 1,354 1,515 SK 426 405 373 RO 2,933 3,047 3,337 CZ 855 849 992 AT/OA 1,568 1,688 1,334 AT/EBOe 1,018 986 1,050 35 OC 106 143 CRE 2,035 2,128 2,022 LC 1,196 1,303 678 AT/SB 2,506 2,557 2,611 SME 2,698 2,657 3,554 Retail 3,420 3,410 3,648 Group 11,996 12,238 12,573 5.9% 8.3% 4.4% 21.7% 21.8% 18.5% 12.9% 14.5% 8.2% 6.6% 6.8% 7.0% 12.5% 12.4% 14.9% 7.3% 7.3% 7.7% 9.4% 9.6% 9.7% 26.6% 5.4% 16.3% 17.4% 13.3% 18.3% 26.4% 5.3% 18.8% 17.7% 26.0% 5.2% 29.3% 30.3% 29.3% 4.6% 4.6% 5.2% 12.9% 14.2% 10.2% 3.6% 3.5% 3.8% 31/03/14 30/06/14 30/06/13 in EUR m in EUR m
Eliminating legacy issues –
NPL coverage rises to multi-year high of 64.0%
Business line view Geographic view
• Improving group coverage ratio over the past quarters following significant provisioning in SME and CRE
• LC: decline in coverage driven by reallocation from SME
• SME: higher qoq coverage due to higher provisioning of new NPLs
• Continued increase in coverage in HR
• AT/OA qoq coverage rise reflects additional provisions in CRE • RO qoq coverage increase on the back of additional provisions for
CRE and SME ahead of accelerated NPL reduction 61 74 71 RS HR 713 675 627 HU 806 841 965 SK 358 354 357 RO 1,894 1,895 2,053 CZ 678 685 725 AT/OA 841 847 718 AT/EBOe 697 673 699 17 73 71 OC CRE 1,142 1,177 1,076 LC 776 864 462 AT/SB 1,573 1,572 1,551 SME 1,724 1,590 2,166 Retail 2,366 2,363 2,477 Group 7,674 7,660 7,757 66.6% 50.8% 47.1% 56.1% 55.3% 53.2% 64.9% 66.3% 68.1% 62.8% 61.5% 59.4% 63.9% 59.8% 60.9% 69.2% 69.3% 67.9% 64.0% 62.6% 61.7% 75.8% 74.8% 81.9% 57.4% 55.6% 48.9% 61.7% 62.1% 63.7% 83.9% 87.4% 95.8% 64.6% 62.2% 61.5% 79.3% 80.7% 73.1% 53.6% 50.2% 53.8% 68.4% 68.2% 66.5% 30/06/14 31/03/14 30/06/13 in EUR m in EUR m
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Eliminating legacy issues –
Banking levies remain drag on profitability and capital generation capacity
Trending down but … … remaining high by international comparison
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• Austria
• New calculation applicable since January 2014 • In negotiation: will payments into resolution fund and
deposit guarantee schemes be deductable?
• Slovakia
• From 2015 onwards banking levies reduced to 0.2% on
corporate and retail deposits instead of 0.4% as total amount already paid in reached EUR 500m by 25 July 2014
• Further reduction to 0.1% when next threshold of EUR 750m is reached
• No banking levy payable in Q4 2014
• Hungary
• Calculation of banking tax still based on balance sheet as of 2009 (approx. 50% higher than current balance sheet total)
• Financial transaction tax introduced in 2013 • No indication for reduction plans yet
in EUR m 49 103 104 32 41 31 165 167 125 -16% +27% 2014e 260 2013 311 2012 246 Austria Hungary Slovakia
Eliminating legacy issues: improved capital position –
CET 1-ratio (fully loaded) at 10.8%, as impairments do not impact capital ratios
Basel 2.5/Basel 3 capital (EUR bn) Risk-weighted assets (EUR bn) Basel 2.5/Basel 3 capital ratios
• Lower qoq deductions from capital due to negative DTA change
• QOQ normalisation of RWAs due to: • Benefit from SME support factor: EUR 1.2bn • Benefit from negative DTA change: EUR
0.4bn
• Exposure reductions: EUR 0.5bn • Migration to default: EUR 0.5bn
• Basel 3 CET1 ratio (final) equalled 10.8% at 30 June 2014 (YE 2013: 10.8%)
• Driven by ytd stability in capital and RWA 31/03/14 15.9 11.3 0.0 4.5 0.0 31/12/13 16.0 11.2 0.4 4.2 0.2 30/09/13 15.7 10.8 0.4 4.3 0.2 30/06/13 16.8 11.9 0.4 4.2 0.3 30/06/14 16.1 11.5 4.7 0.0 0.0 CET1 AT1 Tier 2 Tier 3 31/03/14 102.2 87.9 11.0 3.3 31/12/13 97.9 84.9 10.2 2.9 30/09/13 99.0 86.6 9.3 3.0 30/06/13 100.9 87.3 10.1 3.5 30/06/14 98.0 84.9 10.4 2.7 Credit RWA Op risk Trading risk 15. 5% 31/03/14 11. 1% 11. 1% 31/12/13 16. 3% 11. 8% 11. 4% 30/09/13 15. 8% 11. 2% 10. 9% 30/06/13 16. 6% 12. 2% 11. 8% 30/06/14 11. 7% 11. 7% 16. 5% Tier 1
CET1 Total capital
Basel 2.5 Basel 3 Phased-in Basel 2.5 Basel 3 Phased-in Basel 2.5 Basel 3 Phased-in
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Presentation topics
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• Footprint & business environment
• Challenges for banks
• Eliminating legacy issues
Conclusion –
Outlook
• For Erste Group (consolidated):
• A group operating result, which – despite stable underlying group operating trends – could be pushed slightly below guidance in 2014 due to weaker operating results in Romania and Hungary;
• Risk costs of EUR 2.1 – 2.4bn, depending on booking of Hungarian consumer loan law impact in risk provisions or other operating result;
• A net loss for 2014 of EUR 1.4-1.6bn;
• A CET 1-ratio (fully loaded, based on current definitions) of about 10.0% at year-end;
• Strongly improved post-provision result and net profit (ROTE: 8-10%) in 2015, despite still disproportionate banking levies.
• For the geographic segment Romania: a full normalisation of risk costs at 100-150bps of average
gross customer loans starting in 2015, accompanied by an accelerated NPL reduction (down
about EUR 800 million or 25%, compared to year-end 2013) already in 2014; a significant rise in
the NPL coverage ratio; a lower, but sustainable operating result due to a lower unwinding impact
on net interest income
• For the geographic segment Hungary: a gradual normalisation of risk costs to 150-200bps (by
2016) of average gross customer loans based on the assumption that all government actions will
be completed in 2014; a lower, but sustainable operating result due to lower net interest income
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Investor relations details
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Erste Group Bank AG, Milchgasse 1 (mezzanine floor), 1010 Vienna
Fax : +43 (0)5 0100-13112
E-mail: investor.relations@erstegroup.com
Internet: http://www.erstegroup.com/investorrelations
http://twitter.com/ErsteGroupIR http://www.slideshare.net/Erste_Group
Erste Group IR App for iPad, iPhone and Android http://www.erstegroup.com/de/Investoren/IR_App Reuters: ERST.VI Bloomberg: EBS AV
Datastream: O:ERS ISIN: AT0000652011
•
Contacts
Thomas Sommerauer
Tel: +43 (0)5 0100 17326 e-mail: thomas.sommerauer@erstegroup.com Peter Makray
Tel: +43 (0)5 0100 16878 e-mail: peter.makray@erstegroup.com Simone Pilz
Tel: +43 (0)5 0100 13036 e-mail: simone.pilz@erstegroup.com Gerald Krames
Tel: +43 (0)5 0100 12751 e-mail: gerald.krames@erstegroup.com
