Of Special Interest


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11th October 2011

Erste Bank to take string of charges

Erste Bank has said it will post a 9 month LOSS of around €750m (£649m $1,008m ¥77.3bn Y6,406m) for the 9 months to the end of September after making around €1.6bn in charges after tax.

The bank is making charges relating to Hungary of €762m, Romania of €627m, CDS Reclassification of €180m and effective interest rates of €10m. The rationale for the Hungary operations writedown is that the bank believes that recent actions by the Hungarian government both in general economic terms and what the banks considers 'disproportionate banking tax' has caused it to reasses medium term prospects. The bank expects to make a €500m net loss in its Hungarian operations this year. Part of the legislation requires the bank to convert loans into Hungarian Florints at 'non-market rates'. Thirdly the deteriorating economic position in Hungary has caused it to increase NPL coverage to 62%.

In Romania the bank is now forecasting a slower recovery for the economy and states that changed circumstances warrant a goodwill writedown of its Romanian operation by €700m pre-tax / €627m after tax. As recently as last month the bank agreed to purchase a further 23% in Banca Comerciala Romana taking its overall holding to 93% and increasing overall goodwill to €1.1bn. It continues to justify this move saying that in the longer term the additional income will provide a good return.

The CDS portfolio will be moved entirely to Marked to Market resulting in the €180m one-off charge. In explaining the interest rate charge the bank states "Erste Group is undergoing a group-wide process of aligning methodologies and models with regard to the recognition of income under the effective interest rate method". The charge relates to the period 2005-2010.

The bank reports no problems with sovereign debt. The bank has PIIGS (Portugal, Ireland, Italy, Greece and Spain Sovereign Debt) exposure amounting to €600m and states that 95% of this exposure is Marked to Market as of September 30th. Corporate and retail exposure to the same group of countries is approximately €3bn and mainly relates to Italian and Spanish investments and again is mainly Marked to Market.

The move to fuller use of fair value with further Marked to Market pricing and removal of goodwill should be seen as a positive move both in general, and specifically for Erste in making it less prone to damage by speculation or unfounded rumour. It would be a significant positive move for European banking if more banks were to do the same. The bank will report on Q3 and 9 months result on 28th October.