VIENNA (Reuters) - Erste Group Bank (ERST.VI) forecast on Monday operating profit would fall as much as 5 percent in 2013 rather than holding steady and said it will raise about 660 million euros ($867 million) in equity and repay state aid in the third quarter.
Central and eastern Europe's No. 3 lender said it would repay 1.76 billion euros in non-voting participation capital it got when the financial crisis began. Two-thirds came from the state and the rest from private investors.
Its shares fell 4 percent to 21.07 euros by 0715 GMT while the Stoxx European bank sector index .SX7P rose 0.5 percent.
Erste said by it expected a slight improvement in economic performance for the region in the second half, even though growth rates would remain moderate.
"Erste Group expects the operating result to decline by up to 5 percent in 2013, due to expected lower operating income only being partially off-set by lower operating cost," it said.
Its risk costs were set to fall about 10-15 percent in 2013, mainly due to improvement in Romania, where it reiterated it expected to make a profit this year.
Erste said the redemption would save 149 million euros after tax in 2014 by repaying capital and 158 million in 2015, rising in subsequent years, and was expected to help improve earnings per share from 2014 despite the capital increase, it said.
It said it planned the capital increase via a rights issue "subject to market conditions and the approval by its management and supervisory boards".
"The planned capital increase ... will further strengthen Erste Group's capital base so that Erste Group expects to meet its targeted 10 percent fully loaded Basel 3 common equity Tier-1 ratio by December 31, 2014," it said.
Adjusted for proceeds from the capital hike, Erste's core Tier 1 ratio under capital adequacy rule Basel 2.5, excluding participation capital and retained earnings in the first quarter, would have been 10.2 percent instead of 9.6 percent.
It estimated the switch to Basel 3 standards would have a negative impact of 30 basis points.
It is also switching its method of calculating risk-weighted assets in Romania in 2015, which it said would have a negative impact of about 40 basis points on capital ratios.
($1 = 0.7612 euros)
Reporting by Michael Shields; Editing by Louise Ireland