Erste Group Bank AG
Online Annual Report 2017

Erste Group posts net profit of EUR 1,316.2 million in 2017 (ROTE: 11.5%); proposes dividend of EUR 1.2 per share

  • Net result + 4.1%
  • ROTE 11.5%
  • Loan growth + 6.8%

Highlights

Best result in Erste Group’s history

_ Net result of EUR 1,316.2 million

_ Historically low risk costs

_ Dividend of EUR 1.2 proposed to AGM

Revenues almost stable, costs up on IT spend

_ Revenues pressure eases in volume growth

_ Regulatory requirements drive IT costs

_ Cost/income ratio at 62.4%

Loan growth accelerates to 6.8%

_ Net loans increase to EUR 139.5 billion

_ Retail business as growth driver

_ Growth in Czech Republic, Slovakia and Austria

Positive asset quality trend continues

_ NPL ratio improves further to 4.0%

_ NPL provision coverage at 68.8%

Excellent capitalisation

_ CET 1 ratio increased to 12.9% (Basel 3 fully loaded) 

_ Strong organic capital generation; offset by RWA inflation, partly driven by one-offs

_ Successful issuance of another EUR 500 million additional tier 1 capital

Favourable funding and liquidity position

_ Strong retail deposit base in all core countries is key trust indicator and competitive advantage

_ Loan-to-deposit ratio at 92.4%

Extensive presence in Central and Eastern Europe

Management

Management Board

Petr Brávek, Andreas Treichl, Willibald Cernko, Peter Bosek, Jozef Síkela, Gernot Mittendorfer

Supervisory Board

Gunter Griss, Markus Haag, Karin Zeisel, Andreas Lachs, Elisabeth Bleyleben-Koren, Jan Homan, Friedrich Rödler, Marion Khüny, Barbara Pichler, Maximilian Hardegg, Regina Haberhauer, John James Stack, Elisabeth Krainer Senger-Weiss,Wilhelm Rasinger, Jordi Gual Solé, Jozef Pinter, Brian D. O‘Neill

Performance

Erste Group posts a net profit of EUR 1,316.2 million in 2017 and achieved a return on tangible equity (ROTE) of 11.5%. Based on this record result the management board of Erste Group will propose to the annual general meeting a dividend for the financial year 2017 of EUR 1.20 per share, an increase of 20 percent on the previous year.

Please refer to the links below for detailed information on business performance and segments

Erste Group on the capital markets

Erste Group Share - Share performance in its 20th year on the stockexchange

The uptrend in international stock markets continued in 2017. Share prices rose mainly on the back of the broad-based growth of the global economy, underpinned by positive economic and corporate news flows as well as institutions’ and economists’upward revisions of economic growth, corporate earnings and revenues forecasts for 2017 and subsequent years. The central banks’ rate policies remained at the centre of market attention. While the European Central Bank (ECB) continued its expansionary monetary policy, the US central bank (Fed) raised its key interest rate again in 2017. In this benign environment, which also saw a rebound in European bank share prices, the share of Erste Group, which marked the 20th anniversary of its stock market listing, was up 29.8% on the year.

4 December 2017 marked the 20th anniversary of the Erste Group’s IPO on the Vienna Stock Exchange. Erste Group not only developed from a local Austrian bank to one of the leading financial institutions in Central and Eastern Europe, but has also witnessed a strong, sometimes volatile performance of its share price, which hit its all-time high at EUR 61.5 in April 2007. In the course of the financial crisis, the share price dipped to its historic low of EUR 7.0 in February 2009. Due to Erste Group’s rigorous execution of its business strategy, the share price has since more than quintupled.

Performance of the Erste Group share versus indices
  Erste Group Share ATX DJ Euro Stoxx Bank Index
Since IPO (Dec 1997) 225.80% 162.10% -
Since SPO (Sep 2000) 207.30% 192.70% -62.90%
Since SPO (Jul 2002) 107.20% 180.40% -48.10%
Since SPO (Jan 2006) -19.80% -12.20% -65.60%
Since SPO (Nov 2009) 24.50% 31.30% -42.70%
2017 29.80% 30.60% 10.90%

IPO … initial public offering, SPO … secondary public offering.

Interactive Chart of Erste Group Share 

Information about previous performance does not guarantee future performance.

Shareholder Structure

Ratings as of 31 December 2017
Fitch  
Long-term A-
Short-term F1
Outlook Stable
Moody's Investors Service  
Long-term A3
Short-term P-2
Outlook Positive
Standard & Poor's  
Long-term A
Short-term A-1
Outlook Positive

Trends and Outlook

CEO, Andreas Treichl: "For 2018, we have two clear focus areas: investing in the employees so that we can deliver the best advice to clients, and expanding George as the number one digital banking platform in all of our countries. A fully digitalized bank together with the best client relationship managers is what we are ultimately aiming for.” 

"Having a positive outlook in mind, we feel that our shareholders should benefit from these good 2017 results and will therefore propose to them a dividend of EUR 1.20 per share, an increase of 20 percent on the previous year."

Erste Group targets a return on tangible equity (ROTE) of more than 10% in 2018. The expected very solid macro-economic development in the core markets Czech Republic, Slovakia, Hungary, Romania, Croatia, Serbia and Austria, 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 2018, the positive development of the economy should be reflected in growth rates (real GDP growth) of around 3% to 5% in the 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 rise but remain subdued by historical standards and strong competitive positions should again lead to current account surpluses. The fiscal situation and public debt levels are also projected to remain sound. Austria should see accelerating economic growth at a rate of close to 3%. 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. In 2018, net interest income should also be slightly up on the back of rising short and long-term interest rates, primarily in the Czech Republic and Romania, but also globally, and therefore declining margin pressure from sovereign bond reinvestments. The second key income component, net fee and commission income, is also expected to increase moderately in 2018. As in 2017, some positive momentum should again come from the securities business, fund management and the insurance business. 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 grow slightly in 2018.

Operating expenses are expected to decline marginally in 2018, mainly due to the fact that in 2017 higher IT expenditure was incurred for regulatory projects, which will not recur on the same scale in 2018. However, Erste Group will continue to invest in digitalisation and thereby its future competitiveness in 2018. The focus will be on product simplification, process standardisation or the group-wide implementation of the digital platform George. After its rollout in Austria, George will be fully up and running in the Czech Republic, Slovakia and Romania in 2018.

Overall, the operating result is projected to rise in 2018.

Risk costs should support net profit again in 2018. Amid a moderate rise of interest rates, 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 2017 of just 9 basis points of average gross customer loans. While precise forecasts are difficult in the current environment, Erste Group projects for 2018 risk costs of up to 20 basis points of average gross customer loans. The implementation of accounting standard IFRS 9 is not expected to materially impact financial results in 2018.

Assuming a tax rate of around 22% and a similar level of minority charges, Erste Group aims to achieve a return on tangible equity (ROTE) of more than 10%.

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.

Risk management

A core function of each bank is taking risks in a conscious and selective manner and professionally steer those risks. Adequate risk policy and risk strategy is essential to a bank’s fundamental financial health and operational business success.

Erste Group has developed a risk management framework that is forward-looking and tailored to its business and risk profile. This framework is based on a clear risk strategy that sets out general principles according to which risk taking must be performed across the
group. The risk strategy is consistent with the business strategy and incorporates the expected impact of external environment on the planned business and risk development.

The risk strategy defines the current and the targeted risk profile for the main risk types and sets strategic limits for the significant financial and non-financial risk types as defined in the Risk Materiality Assessment. The risk strategy is executed within a clear defined governance structure. This structure applies also monitoring the risk appetite, additional metrics, as well as escalation of limit breaches.

In 2017, management has continued to steer critical portfolios, including active management of non-performing exposures to further strengthen the risk profile. This has been particularly demonstrated by the continuous improvement of the credit quality and the ongoing decrease of non-performing loans and risk costs.

Sustainability

For Erste Group, considering the impact of its entrepreneurial activities on society is nothing new. On the contrary, looking beyond financial performance is very much in line with the idea of social responsibility to which Erste österreichische Spar-Casse 
committed itself when it was founded almost 200 years ago.

Resolving the conflicting targets of profitability and the ecological and social impact of its business is also a key element for the management of Erste Group. In this regard, Erste Group’s Statement of Purpose offers valuable guidance by defining the following tasks and principles:

_ Disseminating and securing prosperity
_ Accessibility, independence and innovation
_ Profitability
_ Financial literacy
_ It is about people
_ Serving civil society
_ Transparency, stability, simplicity