Erste Group Bank AG
Online Annual Report 2018

Erste Group posts net profit of EUR 1,793.4 million in 2018 (ROTE: 15.2%); proposes dividend of EUR 1.4 per share

  • Best result in Erste Group’s history
  • Significant improvement in operating result
  • Loan growth accelerates

Highlights

Best result in Erste Group’s history

_ Net result of EUR 1,793.4 million

_ Operating result improves, net releases of risk provisions

_ Dividend of EUR 1.4 proposed to AGM

Significant improvement in operating result of 8.9%

_ Net interest income rises visibly by 5.3%

_ Operating expenses almost stable

_ Cost/income ratio at 60.5%

Loan growth accelerates

_ Net loans increase by 7.0% to EUR 149.3 billion

_ Retail business as growth driver

_ Strongest volume growth in Czech Republic, Slovakia and Austria

Positive asset quality trend continues

_ NPL ratio improves further to 3.2%

_ Continued improvement across all core markets

_ NPL provision coverage at 73.0%

Excellent capitalisation

_ CET 1 ratio increased to 13.5% (Basel 3 fully loaded)

_ Internal capital target for 2020 already met

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 91.8%

Extensive presence in Central and Eastern Europe

Management

Management board

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

Supervisory board

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

Performance

Erste Group posts a net profit of EUR 1,793.4 million in 2018 and achieved a return on tangible equity (ROTE) of 15.2%. Based on this record result the management board of Erste Group will propose to the annual general meeting a dividend for the financial year 2018 of EUR 1.40 per share (2017: EUR 1.20 per share).

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

Erste Group on the capital markets

After the gains posted in the previous year, international equity markets registered substantial losses in 2018. Initially, share prices rallied on US markets and, in their wake, also at other international stock exchanges on the back of robust global economic growth, an expected boost from the US tax reform and the prospect of a continuing rise in corporate earnings. Later in the year, however, volatility increased, and share prices declined. This was largely attributable to the trade disputes between the US and its main trading partners, most importantly China and Europe, and their potential impacts on the global economy as well as persistent uncertainty over the terms of the United Kingdom’s forthcoming withdrawal from the European Union (Brexit). In addition, forecasts of slowing global economic growth in the years ahead along with concerns over a visible economic downturn in the US and the simultaneous announcement of further rate hikes by the US central bank (Fed) triggered a sell-off in the equity markets in December. The European banking index shed one-third of its value over the past year. Against this backdrop the Erste Group share declined by 19.5%.

Performance of the Erste Group share versus indices
  Erste Group Share ATX DJ Euro Stoxx Bank Index
Since IPO (Dec 1997) 162.10% 110.40% -
Since SPO (Sep 2000) 147.20% 135.00% -75.20%
Since SPO (Jul 2002) 66.70% 125.10% -65.40%
Since SPO (Jan 2006) -35.40% -29.50% -77.00%
Since SPO (Nov 2009)   0.20%    5.40% -61.80%
2018 -19.50% -19.70% -33.30%

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 29 March 2019
Fitch  
Long-term A
Short-term F1
Outlook Stable
Moody's Investors Service  
Long-term A2
Short-term P-1
Outlook Positive
Standard & Poor's  
Long-term A
Short-term A-1
Outlook Positive

Trends and Outlook

Erste Group targets a return on tangible equity (ROTE) of above 11% in 2019. The expected solid macro-economic development in the core markets Czech Republic, Slovakia, Hungary, Romania, Croatia, Serbia and Austria, compared to 2018 only moderately 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 2019, the positive development of the economy should be reflected in growth rates (real GDP growth) of around 3% in 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 remain broadly stable. Strong competitive positions should again lead to current account surpluses in most countries. The fiscal situation and public debt levels are also projected to remain sound. Austria should see continued dynamic economic growth at a rate of above 2%. 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. Net interest income should thus increase further in 2019. The second key income component, net fee and commission income, is also expected to rise moderately. As in 2018, some positive momentum should again come from fund management and payment services. 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 continue to grow in 2019. Operating expenses are expected to rise in 2019, albeit not to the same extent as operating income, mostly due to anticipated further wage increases in all core markets of Erste Group. However, Erste Group will continue to invest in digitalisation and thereby its future competitiveness in 2019. The focus will be on product simplification, process standardisation as well as the group-wide implementation and expansion of the digital platform George. The roll-out of George will continue in Hungary and Croatia in 2019. Overall, the operating result is projected to rise in 2019.

Risk costs should remain low in 2019. Amid a stable low interest rate environment, 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 2018. While precise forecasts are difficult in the current environment, Erste Group projects for 2019 risk costs of 10 to 20 basis points of average gross customer loans.

The Romanian banking tax will have a negative impact on other operating result in 2019, even though the magnitude remains as yet unclear.

Assuming a tax rate of below 20% and a similar level of minority charges, Erste Group aims to achieve a return on tangible equity (ROTE) of above 11%.

Due to its limited presence in the United Kingdom, Erste Group does not anticipate any material impact from Brexit at the current time.

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 a bank is taking risks in a conscious and selective manner and professionally steering 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 describes the current risk profile, defines risk management principles, strategic goals and initiatives for the main risk types as well as 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 also applies to monitoring risk appetite, additional metrics, as well as to the escalation of limit breaches.

In 2018, management has continued to steer critical portfolios, including active management of non-performing exposures to further strengthen the risk profile. This has been demonstrated in particular by the continuous improvement of credit quality and the ongoing decrease of non-performing loans and negative 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 in 1819.

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

The founding concept of Erste österreichische Spar-Casse, the predecessor of Erste Group, already embraced the idea of contributing to the common good. Erste Group has expanded its core activities from those of a traditional savings bank focused on retail lending and deposit-taking to include those of an international bank providing financial services to all sectors of the economy in its core markets. Unlike the operations of many other financial service providers, Erste Group’s business has always been firmly embedded in the real economy. Customer savings deposits fund the loans for housing construction or purchases or investments by companies. This is how Erste Group creates sustainable value for society. As one of the leading banks in Central and Eastern Europe, Erste Group is also an important employer, taxpayer and customer of – mostly local – suppliers.

According to Erste Group’s own definition, sustainability means to operate the Bank’s core business profitably while also taking into account social and ecological criteria.