2016 Stress Test results: No stress for Erste Group 

“We are more than satisfied that this stress test underscores the strength of Erste Group’s capitalization and business model, as it suggests that we would have a CET1 ratio above 8 percent even following the severe theoretical shock assumed in the test’s adverse scenario. We managed to achieve this solid showing in the stress test despite the fact that its adverse scenario applied especially severe hypothetical parameters for both our region and our business model as a retail bank compared to other European regions and banks”, says Andreas Treichl, CEO of Erste Group.

The European Banking Authority (EBA) has today published the results of the 2016 stress test. The application of the adverse scenario would in the case of Erste Group result in a phased-in CET 1 ratio of 8.2% (year-end 2018) versus a starting point of 12.3% at the end of 2015. In total, the stress-induced change would amount to -416 basis points (bps).

The assumptions underlying the adverse scenario of the stress test include (cumulative impact over forecast period of 2016 to 2018 vs assumed starting values for 2015):

• Decline in real GDP of 1.8% in the European Union (decline of up to 4.2% in Erste Group’s CEE markets
• Decline in residential property prices of 10.9% in the European Union (decline of up to 20.5% in Erste Group’s CEE markets)
• Rise in short- and long-term interest rates. 3M Euribor: +30bps, 10y government bond: +110bps on average in the European Union (increase of up to 190bps in Erste Group’s CEE markets). Assumed asymmetric impact on asset vs liability side, i.e. full re-pricing of liabilities but limited re-pricing of assets
• Depreciation of Erste Group relevant CEE currencies by 8.0% to 23.2% vs EUR, and appreciation of 22.8% of CHF vs EUR
• Stable balance sheet assumption (frozen at 2015 levels).

The main drivers underlying the EBA adverse scenario stress test result are as follows (cumulative impacts over the forecast period of 2016 to 2018 vs 2015 actuals):

• A reduction in net interest income (NII) by about EUR 3.3bn, or, on average, by EUR 1.1bn or about 25% from 2016 onwards as compared to 2015 reported NII. The 2016 estimation is attributable to:
  • EUR 1.6bn NII decline (cumulative, 2016-18), due to re-pricing effects from higher interest rates, assuming broadly stable interest income but a doubling of interest expense throughout the forecast period, compared to 2015 actuals.
  • EUR 1.7bn NII decline (cumulative, 2016-18) due to assumed severe asset quality deterioration (~75%) and non-recognition of incremental unwinding effect (~25%). NPL stock is expected to rise to EUR 15.7bn, resulting in an NPL ratio of 11.9% by the end of the forecast period (2018). This contrasts with the historic peak in NPL volume in June 2013 of EUR 12.6bn (NPL ratio of 9.7%), in the wake of severe asset quality stress in Romania and Hungary, and Q1 16 NPL stock of EUR 8.9bn (NPL ratio of 6.7%). About 45% of the projected NII decline is attributable to Austria.
• An increase in risk costs (loan loss provisions), resulting in risk costs of EUR 4.8bn throughout the 2016-18 forecast period. This contrasts with risk costs of EUR 0.7bn and EUR 25m in 2015 and H1 16, respectively, following an extensive clean-up exercise in 2014 and a number of successful “in line with marks”-NPL sales.

The adverse scenario of the 2016 EBA stress test projects Erste Group to be significantly loss-making throughout the 2016-18 forecast period.

Erste Group confirms its guidance, last updated on 14 July 2016: it expects ROTE to exceed 12% in 2016, including a buffer for potential banking tax one-off payment in Austria in 2016.