Investor information 2024

29.02.2024- Erste Group: Preliminary results 2023

Erste Group posts net profit of EUR 2,998 million in 2023; proposes dividend of EUR 2.7 per share

HIGHLIGHTS

P&L 2023 compared with 2022; balance sheet 31 December 2023 compared with 31 December 2022

Net interest income increased significantly to EUR 7,228 million (+21.5%; EUR 5,951 million), most strongly in Austria, on the back of higher market interest rates as well as larger loan volume. Net fee and commission income rose to EUR 2,640 million (+7.6%; EUR 2,452 million). Growth was registered across all core markets, most notably in payment services but also in asset management and in lending. Net trading result improved to EUR 754 million (EUR -779 million); the line item gains/losses from financial instruments measured at fair value through profit or loss declined to EUR -306 million (EUR 731 million). The development of these two line items was mostly attributable to valuation effects. Operating income increased to EUR 10,552 million (+23.1%; EUR 8,571 million). General administrative expenses were up at EUR 5,020 million (+9.7%; EUR 4,575 million). Personnel expenses rose to EUR 2,991 million (+12.1%; EUR 2,668 million) driven by salary increases. The rise in other administrative expenses to EUR 1,468 million (+8.3%; EUR 1,356 million) was primarily due to higher IT and marketing expenses. Contributions to deposit insurance schemes included in other administrative expenses declined to EUR 114 million (EUR 143 million), most notably in Hungary (where in the comparable period of 2022, the Sberbank Europe deposit insurance case had resulted in higher expenses). Amortisation and depreciation amounted to EUR 560 million (+1.7%; EUR 551 million). Overall, the operating result increased markedly to EUR 5,532 million (+38.4%; EUR 3,996 million). The cost/income ratio improved to 47.6% (53.4%)

The impairment result from financial instruments amounted to EUR -128 million or 6 basis points of average gross customer loans (EUR -300 million or 15 basis points). Net allocations to provisions for loans and advances were posted in all core markets, with the exception of Croatia and Hungary. Positive contributions came from net releases of provisions for commitments and guarantees as well as from income from the recovery of loans already written off (in both cases most notably in Austria).

The NPL ratio based on gross customer loans deteriorated slightly to 2.3% (2.0%). The NPL coverage ratio (excluding collateral) also slipped to 85.1% (94.6%).

Other operating result amounted to EUR -468 million (EUR -399 million). Expenses for annual contributions to resolution funds declined (most notably in Austria and the Czech Republic) to EUR 113 million (EUR 139 million). Banking levies – currently payable in two core markets – were lower at EUR 183 million (EUR 187 million). Thereof, EUR 137 (EUR 124 million) were charged in Hungary. In Austria, banking tax declined to EUR 46 million (EUR 63 million). Valuation effects had an adverse impact on other operating result.

Taxes on income amounted to EUR 874 million (EUR 556 million). The rise in the minority charge to EUR 923 million (EUR 502 million) was attributable to significantly better results from the savings banks – primarily due to higher net interest income. The net result attributable to owners of the parent rose to EUR 2,998 million (EUR 2,165 million) on the back of the strong operating result and low risk costs.

Total equity not including AT1 instruments rose to EUR 26.1 billion (EUR 23.1 billion). After regulatory deductions and filtering in accordance with the CRR, common equity tier 1 capital (CET1, final) rose to EUR 22.9 billion (EUR 20.4 billion), as were total own funds (final) to EUR 29.1 billion (EUR 26.2 billion). Total risk – risk-weighted assets including credit, market and operational risk (CRR, final) – increased to EUR 146.5 billion (EUR 143.9 billion). The common equity tier 1 ratio (CET1, final) improved to 15.7% (14.2%), the total capital ratio rose to 19.9% (18.2%).

Total assets increased to EUR 337.2 billion (+4.1%; EUR 323.9 billion). On the asset side, cash and cash balances increased to EUR 36.7 billion (EUR 35.7 billion), loans and advances to banks rose to EUR 21.4 billion (EUR 18.4 billion), most notably in Austria and the Czech Republic. Loans and advances to customers rose to EUR 207.8 billion (+2.8%; EUR 202.1 billion) with both retail and corporate loan volumes up. On the liability side, deposits from banks declined to EUR 22.9 billion (EUR 28.8 billion). Customer deposits rose in nearly all core markets – most strongly in Austria and the Czech Republic – to EUR 232.8 billion (+3.9%; EUR 224.0 billion). The loan-to-deposit ratio stood at 89.3% (90.2%)

OUTLOOK 2024

Erste Group’s goal for 2024 is to achieve a return on tangible equity (ROTE) of about 15%. Three key factors will support achievement of this goal: firstly, a moderate improvement in economic growth compared to 2023 in Erste Group’s seven core markets (Austria, Czech Republic, Slovakia, Romania, Hungary, Croatia and Serbia) despite continued geopolitical risks, which, should they materialise, would likely negatively impact economic performance; secondly, a continued broadly positive, even if slightly deteriorating credit risk environment; and, finally, the continuous ability of Erste Group to attract new and retain existing customers through continuous development of its product portfolio and its brand. The key headwind to achievement of this goal is the magnitude and timing of the expected central bank rate cuts in all of Erste Group’s markets. Overall, Erste Group expects a slight decline in operating result, which hit a historic high in 2023, and, consequently, a moderate deterioration in the cost/income ratio to a level of about 50%, also from a historic best in 2023 of 47.6%.

The expectation by economists is for Erste Group’s core markets to post improved real GDP growth in 2024. Inflationary pressures are expected to continue their downward trend in 2024. Continued strong labour markets should be supportive of economic performance in all of Erste Group’s markets. Current account balances are projected to remain at sustainable levels in most countries, while fiscal deficits should continue their path of consolidation. Public debt to GDP in all Erste Group markets is projected to be broadly stable, and hence remain materially below the euro zone average.

Against this backdrop, Erste Group expects net loan growth of about 5%. Retail and corporate business should contribute in all markets towards the achievement of this goal. Loan growth is projected to offset some of the interest rate headwinds detailed above, resulting in a moderate, decline of about 3% in net interest income versus 2023, following a historic upswing over the past two years. The second most important income component – net fee and commission income – is expected to rise by about 5%. As in 2023, growth momentum should again come from payment services, insurance brokerage fees as well as asset management and securities business with the latter being dependent on a constructive capital markets environment. The net trading and fair value result, which recovered significantly in 2023, is expected to normalise at historically observed levels in 2024. This, however, will depend substantially on the actual short- and long-term interest rate environment.

The remaining income components are forecast to remain, by and large, stable. Overall, operating income is therefore expected to decrease slightly in 2024, albeit from a historic high in 2023. Operating expenses are expected to rise by approximately 5%. With this the cost/income ratio should remain at a solid level of about 50%.

Based on the macro-outlook presented above, risk costs should remain at a low level in 2024. While precise forecasting is hard at current low risk cost levels, Erste Group believes that in 2024 risk costs will be below 25 basis points of average gross customer loans.

While a forecast for other operating result and various categories of gains and losses from financial instruments not measured at fair value is challenging, this combined item is likely to improve versus 2023 in the absence of significant one-off effects. Assuming an effective group tax rate of below 20% and lower minority charges compared to 2023, Erste Group aims to achieve a ROTE of about 15% in 2024. The CET1 ratio is expected to remain strong, providing enhanced capital return and/or M&A flexibility, despite Erste Group targeting the execution of a share buyback in the amount of EUR 500 million in 2024.

Potential risks to the guidance include (geo)political and economic (including monetary and fiscal policy impacts) developments, regulatory measures as well as changes to the competitive environment. International (military) conflicts, such as the war in Ukraine and in the Mid East do not impact Erste Group directly, as it has no operating presence in the regions involved. Indirect effects, such as financial markets volatility, sanctions-related knock-on effects, supply chain disruptions or the emergence of deposit insurance or resolution cases cannot be ruled out, though. Erste Group is moreover exposed to non-financial and legal risks that may materialise regardless of the economic environment. Worse than expected economic development may put goodwill at risk.