April 30, 2020 / 7:41 AM / a month ago

Erste Group warns of significant drop in 2020 net profit

VIENNA (Reuters) - Austrian lender Erste Group (ERST.VI) said it expects a significant drop in its 2020 net profit after posting a 38% fall for the first quarter as it felt the effects of the coronavirus restrictions on its business.

FILE PHOTO: The new headquarters building of Erste Group Bank is pictured in Vienna, Austria, February 26, 2016. REUTERS/Heinz-Peter Bader

“While quantifying the drop in profitability is a very challenging task given the ongoing lack of predictability of events, we must expect that in 2020 our operating income and hence also the operating result will decline, risk costs for customers loans will rise and the net result will ultimately go down,” said Chief Executive Bernhard Spalt.

Nearly all governments have issued measures that require banks to offer repayment moratoria on loans to retail and corporate clients. Hungary, one of Erste’s markets, introduced an extra tax.

“Overall, a significant drop in net profit is expected in 2020,” the bank said.

One of the largest financial services providers in the eastern part of the European Union in terms of clients and total assets, Erste said it was its “firm intention” to pay a dividend for 2019 but the amount would be determined by economic realities. Initially, the bank had proposed to pay 1.5 euros per share.

The central and eastern European countries in which Erste Group operates have so far fared comparatively well in terms of virus spread and first steps to exit lockdowns have been taken in countries including the Czech Republic and Austria.

The lender expects its markets’ economies to decline 4-7% this year. Erste Group’s gross credit exposure to the tourism, services, transport and retail sectors, which it predicts will be hardest hit by the effects of the pandemic, is 39% according to a presentation.

First-quarter risk costs were at 15 basis points and not yet impacted by the deterioration of the macro economy, the bank said, but risk costs were “the wildcard for 2020 and beyond”.

Based on the current most probable scenario that assumed a six-month V-shape recovery, the lender estimates risk costs at 50-80 basis points of average gross customer loans this year.

Net profit reached 235.3 million euros ($256 million) in the January-March period, beating expectations of 222 million euros according to a company poll.

Net interest income - or earnings on loans minus deposit costs - rose 5.9% to 1.23 billion euros in the period, thanks to solid demand in the Czech Republic, Austria and Romania.

At the end of March, Erste Group had a core tier-1 capital ratio (CET 1) - the strictest measure of solvency - of 13.1% versus 13.7% at end-December, while its non-performing loan ratio stood at 2.4%, down from 2.5%.

Erste Group sticks to its medium-target of a CET 1 ratio of 13.5%.

Reporting by Kirsti Knolle; Editing by Michelle Martin

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