Unchanged regional footprint; interest in Poland remains in the medium-term
Signifi cant impairments and risk provisions affected 2014 results, turnaround penciled for 2015 Hungarian government and the EBRD to acquire stake in Erste HU
Since exiting Ukraine two years ago, Erste Group has not changed its regional footprint with a strong retail franchise in the Czech Republic, Slovakia, Hungary, Croatia and Romania. While the management still expressed interest in enter- ing the Polish market in the long-term, it ruled out any acquisition within the next two years. The current capitalization level and valuation differential between the Erste Group share and potential Polish targets would not allow such a step. In the short- to medium-term, rather bold-on acquisitions to improve the market share in existing countries might be on the agenda. This was evidenced by Erste’s interest in Citi’s retail portfolio in Hungary and in the Czech Republic. In the past year, the management’s attention was on restructuring the group’s Romanian and Hun- garian operations with the target to return to positive profitability in 2015 (Roma- nia) and 2016 (Hungary). Also, on group level several restructuring steps have been undertaken with the target to transfer a larger part of the corporate busi- ness gradually to local banks.
In Hungary, Erste Group signed an agreement with the government and the EBRD that is aimed to enhance the effectiveness of the Hungarian banking sector via a series of measures (substantial reduction of the banking tax, no further costs in the FX conversion process, no new laws dragging on banks’ profitability, ensur- ing fair competition among local and foreign players). Based on this agreement, Erste Group has invited the government and the EBRD to invest in its local oper- ation via the acquisition of a 15% stake each. Negotiations are in progress and the government has set aside HUF 15 bn in the 2015 budget for the purchase of a 15% stake in Erste Hungary. In exchange, Erste announced the introduction of several programs to support lending growth over a period of three years.
Overall CEE lending volume was eroding by 3% attributable to FX retail loan con- version and muted lending activity in Hungary (down 20% yoy in EUR-terms) and NPL sales and selective SME lending in Romania. While other markets showed flat or slightly increasing loan volumes yoy, Erste’s Slovakian unit reported a 12% loan growth based on market share gains and a stronger demand for consumer and mortgage loans. Given its strong retail franchise in the Czech Republic and Slovakia, Erste’s funding position in CEE remains favorable with a regional L/D ratio of 92%. For 2015, the management expects low single digit loan growth on group level with contributions from all countries (except Croatia). The NPL ra- tio in CEE improved from 14.2% in the fourth quarter of 2013 to 12.3% in the fourth quarter of 2014 (11.6% in the first quarter of 2015) based on a 16%
Key business position indicators in CEE
2010 2011 2012 2013 2014
Total assets (EUR mn) 83,625 84,028 83,839 79,322 75,178
Number of countries in CEE 7 7 6 6 6
Market share in CEE (% of total assets) 4.1% 3.8% 3.4% 3.1% 3.1%
Number of branches in CEE 2,160 2,140 1,937 1,861 1,828
Source: company data, calculation by RBI/Raiffeisen RESEARCH 44 46 48 50 52 54 56 2012 2013 2014 Loans Deposits
Loans and deposits in CEE*
* EUR bn, aggregated data of CEE subsidiaries Source: company data
0.0% 5.0% 10.0% 15.0% 20.0% 0.00% 1.00% 2.00% 3.00% 4.00% 2010 2011 2012 2013 2014 NPL Ratio (r.h.s.)
Annual provisioning/Gross loans Asset quality in CEE*
* aggregated data of CEE subsidiaries
Source: company data, calculation by RBI/Raiffeisen RESEARCH
Market players in CEE
decline in NPL stock driven by signif- icant NPL sales (mainly in Romania) and lower gross inflows on supportive trends overall (except Croatia).
Erste’s 2014 results (EUR 1,442 mn net loss on group level) were charac- terized by additional risk provisioning in Romania (EUR 400 mn) and impair- ment of intangibles in Romania (good- will, brand, customer stock of about EUR 810 mn), the effect of the Hun-
garian consumer loan law including the FX mortgage conversion (EUR 312 mn) as well as impairments of goodwill in Croatia (EUR 156 mn) and deferred tax assets (EUR 197 mn). The first quarter result in 2015 demonstrated a strong re- bound (EUR 226 mn net profit) due to a significant decline in risk costs especially in Romania and Hungary. Targeting a ROTE of 8% to 10% for 2015, translat- ing into a net profit range of about EUR 700 mn to 900 mn, Erste’s management also expects the significant earnings rebound in 2015 based on a significant de- cline in risk costs towards a target range of EUR 1.0 bn to 1.2 bn. The operating result is expected to decline in the mid-single digits on the back of lower operat- ing result in Hungary (FX mortgage conversion, consumer loan law) and Roma- nia (lower unwinding impact post NPL sale) as well as NIM pressure given the low interest environment.
Financial analysts: Text: Stefan Maxian, Raiffeisen Centrobank Data: Jovan Sikimic, Raiffeisen Centrobank
Key performance indicators CEE business (aggregated data of CEE subsidiaries, all indicators in EUR)
2010 2011 2012 2013 2014
Assets and loans*
Asset growth (% yoy) 5.8% 0.5% -0.2% -5.4% -5.2%
Loans/total assets (%) 62% 62% 62% 62% 64%
Retail loans/total loans (%) 61% 61% 61% 57% 60%
Corporate loans/total loans (%) 33% 33% 33% 43% 40%
Credit risk
Growth customer loans (% yoy)** 5.2% 1.5% 0.1% -5.3% -2.8%
Gross non-performing loans (% of total loans) 10.2% 13.3% 14.9% 14.2% 12.3%
Loan loss reserves/non-performing loans (%) 62% 62% 62% 66% 74%
Annual provisioning/customer loans (%) 2.66% 3.30% 2.61% 2.07% 3.16%
Funding
Customer deposits/total assets (%) 63% 62% 65% 67% 69%
Customer loans/customer deposits (%) 99% 101% 96% 93% 92%
Deposit growth (% yoy) 5.7% -0.8% 4.6% -3.0% -1.1%
Profi tability and capitalization
Cost/Income (%) 43% 44% 45% 44% 45%
NII/total assets (%) 3.9% 3.9% 3.6% 3.5% 3.4%
Return on Assets (pre-tax proportional, %) 1.14% 0.62% 0.97% 1.05% 0.00%
Profit before tax (EUR mn, proportional) 951 519 810 829 3
Total CAR ratio (%)*** 13.5% 14.4% 15.5% 16.3% 15.7%
Tier-1 ratio (%), at the group level**** 11.8% 12.2% 13.5% 11.8% 10.6%
Core Tier-1 ratio (%), at the group level***** 9.2% 9.4% 11.2% 11.4% 10.6%
* 2011 including Ukraine ** adjusted for M&A
*** 2014 - Basel 3 fully loaded; 2013 Basel 2.5 on total risk; 2010-2012 Basel 2 incl. participation capital
**** 2014 - Basel 3 fully loaded; 2013 Basel 2.5 on total risk; 2010-2012 Basel 2 (credit risk) incl. participation capital ***** 2014 - Basel 3 fully loaded; 2010 - 2013 acc. to Basel 2.5 on total risk; 2010-2012 inlcuding participation capital Source: company data, calculation by RBI/Raiffeisen RESEARCH
Countries of signifi cant presence in CEE (% of total assets)
Banks’ market share (%) Overall market data
Market share foreign- owned banks (%) Market share Top 5 banks (%) 2009 2014 2009 2014 2014 Hungary* 8.5 5.9 69.2 60.8 50.0 Czech Republic 20.3 15.9 87.1 83.5 63.0 Slovakia 21.7 22.3 98.8 98.5 63.2 Romania 19 16.2 85.3 89.9 54.1 Croatia 13.7 14.9 90.9 88.3 75.4
* foreign-owned banks excl. OTP
Market players in CEE
OTP
Agreement with EBRD and banks should provide a more bank-friendly environment in Hungary Ukrainian and Russian operations expected to be loss making in 2015
Strong capitalization allows for further M&A activity
OTP did not change the setup of its CEE presence over the past years. Still, the bank closed two smaller acquisitions in 2014 and increased its market share in Croatia and Romania by buying Croatian assets from Italy’s Banco Populare and the Romanian entity of Portuguese BCP. The management continues to look at markets where OTP has subscale operations and opportunistically looks at other targets. The targeted year-end 2015 CET1 ratio of 13.5% (13.0% as of Q1) should provide room for further mid-scale M&A activity. In Russia, OTP’s manage- ment targets to reduce loan volumes and gradually shift operations from a POS/ consumer credit focused bank towards a retail direct bank by launching a new direct bank (Touch Bank) with the focus on affluent and mass affluent segments.
In 2014, OTP had to swallow a HUF 156 bn P&L impact (after tax) of regula- tory changes related to consumer contracts in Hungary. On a retroactive basis, the use of FX conversion margins as well as several unilateral consumer contract amendments were declared unfair and void. Banks had to treat “overpayments” as principal pre-payments and adjust installments ahead of the conversion of FX mortgage loans. Besides the above mentioned one-off impact, OTP assumes that the new regulation will impact the bank’s NII by around HUF 10 bn to 12 bn annually. However, we expect at least some compensation of the NII impact by lower risk costs as the fading FX-related credit risk and reduced mortgage install- ments. Several government initiatives to revive loan growth should support the clearly improving risk costs trend of the past quarters. Earlier in 2015, the Hun- garian government and the EBRD sealed an agreement to enhance the effective- ness of the Hungarian banking sector via a series of measures to be implemented over the short- to medium-term, including a significant reduction of the banking tax, assurance of no further costs for FX mortgage conversion and the promise of no new laws or measures that may have a negative impact on the profitabil- ity of the banking sector. Also, the implementation of an enhanced Funding for Growth Scheme with cheap funding and partial risk sharing provided by the Central Bank should help to revive corporate lending and improve the sentiment among banks in Hungary.
Adjusted for FX effects, OTP’s gross loan volume dropped by 6% at group level in 2014. This drop was driven by a 12% loan volume decrease in Hungary due to the state bundling of municipal loans and further erosion of mortgage and con- sumer lending as well as a loan volume contraction of about 24% in Ukraine.
Key business position indicators in CEE
2010 2011 2012 2013 2014
Total assets (EUR mn) 38,329 35,877 37,255 37,318 37,533
Number of countries in CEE 9 9 9 9 9
Market share in CEE (% of total assets) 1.9% 1.6% 1.5% 1.5% 1.6%
Number of branches in CEE 1,508 1,424 1,401 1,434 1,421
Source: company data, calculation by RBI/Raiffeisen RESEARCH 19 20 21 22 23 24 25 2012 2013 2014 Loans Deposits
Loans and deposits in CEE*
* EUR bn, aggregated data of CEE subsidiaries Source: company data
0.0% 5.0% 10.0% 15.0% 20.0% 25.0% 3.00% 3.20% 3.40% 3.60% 3.80% 4.00% 2010 2011 2012 2013 2014 NPL Ratio (r.h.s.)
Annual provisioning/Gross loans Asset quality in CEE*
* aggregated data of CEE subsidiaries
Source: company data, calculation by RBI/Raiffeisen RESEARCH
Market players in CEE
On the other hand, loan growth was visible in Bulgaria (corporate lend- ing), Slovakia (consumer lending) and Serbia (corporate and consumer lend- ing). OTP’s funding profile improved on 11% deposit growth, which was mainly driven by 13% volume growth in Hungary (driven by institutional fund deposits and retail) and a 14% increase in Bulgaria.
The 2015 loan development should be impacted by FX conversion. Excluding this effect, loan volume should bottom-out low to mid-single digit in Hungary ac- cording to OTP. Apart from an upbeat outlook for OTP’s core markets Hungary and Bulgaria, the bank’s management still expects Ukrainian and Russian oper- ations to remain in the red in 2015, despite the already significant impairments of 2014.
Financial analysts: Text: Stefan Maxian, Raiffeisen Centrobank Data: Jovan Sikimic, Raiffeisen Centrobank
Key performance indicators CEE business (aggregated data of CEE subsidiaries, all indicators in EUR)
2010 2011 2012 2013 2014
Assets and loans
Asset growth (% yoy) 0.3% -6.4% 3.8% 0.2% 0.6%
Loans/total assets (%) 69% 68% 66% 64% 56%
Retail loans/total loans (%) 64% 66% 68% 68% 69%
Corporate loans/total loans (%) 31% 30% 29% 29% 28%
Credit risk
Growth customer loans (% yoy)* 2.0% -8.2% 1.1% -3.3% -12.3%
Gross non-performing loans (% of total loans) 13.7% 16.6% 19.1% 19.8% 19.3%
Loan loss reserves/non-performing loans (%) 74% 80% 80% 84% 84%
Annual provisioning/customer loans (%) 3.67% 3.37% 3.40% 3.60% 3.85%
Funding
Customer deposits/total assets (%) 54% 59% 61% 62% 65%
Customer loans/customer deposits (%) 128% 126% 116% 109% 91%
Deposit growth (% yoy) -1.8% 2.4% 6.3% 2.7% 4.3%
Profi tability and capitalization***
Cost/Income (%)** 43% 45% 46% 48% 50%
NII/total assets (%) 5.7% 6.1% 6.0% 5.8% 5.2%
Return on Assets (pre-tax proportional, %) 1.86% 1.97% 1.80% 1.57% 1.20%
Profit before tax (EUR mn, proportional) 712 706 672 585 452
Total CAR ratio (%), at the group level 17.5% 17.3% 19.7% 19.7% 17.5%
Tier-1 ratio (%), at the group level 14.0% 13.3% 16.0% 17.4% n.a.
Core Tier-1 ratio (%), at the group level 12.1% 12.4% 15.1% 16.0% 14.1%
* not adjusted for M&A and FX
** operating cost/ NII+Fees+Other non-interest income *** from Q1 2014 the Basel 3 regulation has been applied Source: company data, calculation by RBI/Raiffeisen RESEARCH
Countries of signifi cant presence in CEE (% of total assets)
Banks’ market share (%) Overall market data
Market share foreign- owned banks (%) Market share Top 5 banks (%) 2009 2014 2009 2014 2014 Hungary* 18.2 22 69.2 60.8 50.0 Slovakia 2.7 2.5 98.8 98.5 63.2 Bulgaria 12.5 11.7 83.5 76.3 54.3 Croatia 3.5 3.9 90.9 88.3 75.4
* foreign-owned banks excl. OTP
Market players in CEE
UniCredit
CEE division posted good profi tability in 2014, supported by the group’s business streamlining in the region NPL ratio virtually unchanged in CEE, albeit credit risk costs decline
Sober core funding supports further lending potential
UniCredit Group’s presence in the CEE region is one of the largest among the Western European banks, with total assets in the region over EUR 120 bn as at year-end 2014 (the bank’s CEE division and Poland, which is regarded as a separate division, taken together). The group remains committed to CEE and, al- though it implements certain downscaling adjustments in the most risky countries, it keeps its CEE assets and market shares high. The group’s CEE performance in 2014 was strong, as the restructuring and streamlining of the past years has started to pay off. Additional support comes from the macro upturn in the region as well as visible improvement of risk costs in most CEE countries. The group’s divisions in CEE and Poland delivered more than half of the group’s profits in 2014, albeit they were somewhat lower than in 2013 (profit before tax was down 4% yoy in the CEE division and 2% down yoy in Poland). Nevertheless, in nominal terms the consolidated profit of the CEE division exceeded EUR 1 billion in 2014 and profits in Poland contributed EUR 327 mn.
In 2014, UniCredit finalized the integration of its Czech and Slovak subsidiaries, completed the restructuring in the Balkans, and went on adjusting its branch net- works and the cost efficiency across the regional divisions. The result of the lat- ter was a 44% contraction of the number of branches in the CEE division, which has come down by about 450 branches (16%) between 2010 and 2014. The group’s Cost/Income ratio in CEE division thus recorded at 41.5% in 2014, which was one of the lowest among its peers (47% for Poland). In EE, UniCredit exited from Kazakhstan (sold to ATF bank in 2013) and keeps its Ukrainian unit for sale.
The group’s lending volume in the CEE region stayed approximately flat in 2014. Country-wise, however, the dynamics were diverse. The group’s lending (EUR- terms) saw the strongest momentum in Bulgaria (17% yoy growth), Poland (7% yoy), Serbia (6% yoy) and Romania (7% yoy). A lending contraction (in EUR- terms) was posted in Russia (down 7% yoy, while LCY-denominated loans saw growth largely due to the LCY depreciation), and Slovenia (down 8% yoy). The consolidated CEE RWA were still on the rise, with total RWA growth of 3% yoy in Poland, and 9% yoy in the CEE division.
Country-wise the group was by and large cash-flow positive in its CEE division countries, with only one market – Slovenia – posting a moderately negative per- formance in 2014. The major profit contributors were Poland, the Czech Re-
Key business position indicators in CEE*
2010 2011 2012 2013 2014
Total assets (EUR mn) 110,526 116,255 121,555 120,074 120,307
Number of countries in CEE 14 14 13 12 12
Market share in CEE (% of total assets) 5.5% 5.2% 4.9% 4.7% 5.0%
Number of branches in CEE 2,903 2,861 2,658 2,522 2,454
* 2014 including Ukraine (held for sale); Baltics treated as 1 country; Source: company data, calculation by RBI/Raiffeisen RESEARCH 72 74 76 78 80 82 2012 2013 2014 Loans Deposits
Loans and deposits in CEE*
* EUR bn, aggregated data of CEE subsidiaries Source: company data
9.0% 10.0% 11.0% 12.0% 0.00% 0.50% 1.00% 1.50% 2.00% 2010 2011 2012 2013 2014 NPL Ratio (r.h.s.)
Annual provisioning/Gross loans Asset quality in CEE*
* aggregated data of CEE subsidiaries
Source: company data, calculation by RBI/Raiffeisen RESEARCH
Market players in CEE
public, Slovakia and Russia. The latter was notwithstanding the headwinds of the second half of 2014. On the core funding side, we see the group to be well-positioned to get ready to a (widely expected) economic up- turn in the CEE region. Customer de- posit growth posted a sanguine 4% yoy growth in the CEE division and 2% yoy growth in Poland. As a result, the L/D ratio in the CEE division was 111% and 89% in Poland, allowing sufficient room for further expansion in case the macro-stance appears to be supportive.
Risk costs, one of the major weak
points of UniCredit in the previous years, continue to be a main concern for the group’s financial performance, as they stay particularly high in Italy, the group’s home market. In the CEE region, however, the aggregate risk costs posted a no- table decline, from 192 bp in 2013 to 118 bp in 2014, signaling an improved asset quality of the newly uploaded loan book. The progress was especially no- table in Hungary, where the risk costs lowered from 270 bp in 2013 to 114 bp in 2014. The highest risk costs remain in SEE (e.g. Romania, Serbia) and Slove- nia. The NPL ratios both in the group’s CEE division and in Poland remain virtu- ally flat, with 12% in the former and just-below 7% in the latter.
Financial analysts: Text: Elena Romanova, RBI Vienna Data: Jovan Sikimic, Raiffeisen Centrobank
Key performance indicators CEE business (aggregated data of CEE subsidiaries, all indicators in EUR)
2010 2011 2012 2013 2014
Assets and loans
Asset growth (% yoy) 2.7% 5.2% 4.6% -1.2% 0.2%
Loans/total assets (%) 65% 65% 62% 65% 65%
Retail loans/total loans (%) n.a. n.a. n.a. n.a. n.a.
Corporate loans/total loans (%) n.a. n.a. n.a. n.a. n.a.
Credit risk
Growth customer loans (% yoy)* 5.8% 5.1% -0.5% 3.9% 0.5%
Gross non-performing loans (% of total loans) 11.8% 11.8% 10.0% 10.6% 10.7%
Loan loss reserves/non-performing loans (%)** 54% 53% 56% 57% 59%
Annual provisioning/customer loans (%) 1.77% 1.25% 1.15% 1.41% 1.00%
Funding
Customer deposits/total assets (%) 63% 63% 63% 67% 68%
Customer loans/customer deposits (%) 104% 103% 98% 98% 97%
Deposit growth (% yoy) 4.9% 6.4% 4.4% 3.8% 1.9%
Profi tability and capitalization***
Cost/Income (%) 47% 46% 45% 44% 44%
NII/total assets (%) 3.2% 3.1% 2.8% 2.7% 2.8%
Return on Assets (pre-tax proportional, %) 1.07% 1.37% 1.37% 1.26% 1.25%
Profit before tax (EUR mn, proportional) 1,185 1,589 1,661 1,512 1,506
Total CAR ratio (%), at the group level 12.7% 12.4% 14.5% 13.6% 13.6%
Tier-1 ratio (%), at the group level 9.5% 9.3% 11.4% 10.1% 11.3%
Core Tier-1 ratio (%), at the group level 8.6% 8.4% 10.8% 9.6% 10.4%
* not adjusted for M&A ** incl. Turkey for 2010-2012
*** 2012, 2013 transitional; 2014 fully loaded Basel 3 Source: company data, calculation by RBI/Raiffeisen RESEARCH
Countries of signifi cant presence in CEE (% of total assets)
Banks’ market share (%) Overall market data
Market share foreign- owned banks (%) Market share Top 5 banks (%) 2009 2014 2009 2014 2014 Poland 10.6 5.9 62.9 59.5 49.0 Czech Republic 6.4 9.1 87.1 83.5 63.0 Hungary* 5.2 7 69.2 60.8 50.0 Romania 6 7.9 85.3 89.9 54.1 Croatia 25.3 25.4 90.9 88.3 75.4 Bulgaria 16.3 17.4 83.5 76.3 54.3 Serbia 5.8 8.7 74.3 74.5 50.0 Bosnia a.H.** 16.4 21.6 95.0 90.0 64.5 Russia*** 2.1 1.7 8.6 7.6 56.4
* foreign-owned banks excl. OTP
** UniCredit bank and UniCredit bank Banja Luka *** 100% of foreign-owned banks