Bancherul - BANCI / ENGLISH / Erste Group takes extraordinary charges leading to a net loss of EUR 973.0 million in the first nine months of 2011 and significantly reduces CDS exposure

* As pre-announced on 10 October 2011, significant charges (write-down of goodwill in Hungary and Romania, additional risk provisions in Hungary, and expenses resulting from the change in the fair value of the CDS portfolio) resulted in a net loss after minorities of EUR 973.0 million (1-9 2010: net profit of EUR 633.8 million). Banking taxes in Austria and Hungary came to EUR 140.2 million (before taxes).

* In the first nine months of 2011, net interest income rose by 0.9% to EUR 4,134.1 million (1-9 2010: EUR 4,095.8 million). Meanwhile, net commission income declined by 1.3% to EUR 1,352.0 million (1-9 2010: EUR 1,370.0 million). At EUR 37.4 million, the net trading result - substantially negatively affected by the volatility of the CDS portfolio - was 87.1% lower than in the first nine months of 2010 (EUR 290.4 million).

* Despite higher inflation, general administrative expenses grew only by a moderate 0.7% to EUR 2,891.6 million (1-9 2010: EUR 2,871.7 million). The change in the fair value of the CDS caused the operating result to decline by 8.8% from EUR 2,884.5 million to EUR 2,631.9 million in the first nine months of 2011. The cost/income ratio stood at 52.4% (same period 2010: 49.9%).

* Risk costs were up 17.0% from EUR 1,588.4 million (162 basis points of average customer loans) in the first three quarters of 2010 to EUR 1,859.2 million, or 184 basis points. This was largely due to the need for additional risk provisions in Hungary (partly a consequence of continuing political intervention). Asset quality improved in the Czech Republic, in Slovakia and in Austria. The NPL ratio in relation to customer loans rose to 8.2% at 30 September 2011 (year-end 2010: 7.6%). The NPL coverage ratio improved to 63.9% (year-end 2010: 60.0%).

* Total assets, at EUR 216.1 billion, were up 5.0% for the year to date from EUR 205.8 billion. The loan-to-deposit ratio improved to 111.2% at 30 September 2011 (year-end 2010: 113.1%). While customer deposits, at EUR 121.6 billion, were up 3.9% year to date, lending volume rose by just 2.2% to EUR 135.2 billion.

* Erste Group's shareholders' equity amounted to EUR 11.9 billion at 30 September 2011 (year-end 2010: EUR 13.1 billion) and core tier 1 capital to EUR 10.6 billion (year-end 2010: EUR 11.0 billion). With loan volume stable, total risk-weighted assets were largely unchanged versus year-end 2010 at EUR 119.9 billion. The tier 1 ratio (total risk) stood at 9.8% (year-end 2010: 10.2%) and the core tier 1 ratio (total risk) at 8.8% (year-end 2010: 9.2%).

"Following our pre-announcement for the third quarter on 10 October concerns were raised in relation to our CDS exposure. We have reacted to this and reduced our portfolio from EUR 5.2 billion at the end of September to 0.3 billion yesterday with no additional negative P&L effect", commented Andreas Treichl, CEO of Erste Group Bank AG, at the results presentation for the first nine months of 2011, said the bank in a press release.

"Let me also be very clear about one thing: for anybody who over the last couple of weeks had doubts about what Erste Group stands for I have only one answer: we are the retail and corporate bank in the eastern part of the European Union. The most recent events have just strengthened this conviction", Treichl said.

"Our view is confirmed by the performance of Česká spořitelna, Slovenská sporiteľňa, Erste Bank Oesterreich and Erste Bank Croatia, all of which are doing well: operating and net profit are up year on year, risk costs are down over the same period. In Romania GDP growth is still slow, as is our business performance, but the domestic economy should be supported by a better EU funds absorption rate going into 2012. In Hungary we have started a strategic review with the aim to reposition our bank towards extending local currency loans funded by local currency deposits", Treichl concluded.

Outlook

As a result of the above measures Erste Group is expected to post a net loss of about EUR 700-800 million in 2011 (before extraordinary charges a net profit of about EUR 850-950 million). Risk costs on group level are expected to amount to EUR 2.3 billion (before extraordinary charges: EUR 1.8 billion) in 2011.

Erste Group's operating profit will remain a pillar of strength in 2011 and beyond, benefiting from significantly reduced P& L volatility following the substantial reduction in CDS exposure. In relation to the latter our clear objective is to close out the CDS book within the next couple of days.

The European Banking Authority has defined a capital threshold of 9% that has to be met by June 2012. Based on the figures for the first six months of 2011 and excluding private participation capital of EUR 540 million, Erste Group has a capital short fall of EUR 59 million. The final figure for the capital shortfall will be based on 1-9 2011 figures and therefore take into account Erste Group's recently implemented measures. In the normal course of business retained earnings until June 2012 should cover most of the shortfall.