Erste Bank warns of $1 bln loss

Erste Group Bank, emerging Europe's second-biggest lender, said it would lose up to 800 million euros ($1 billion) this year and not pay a dividend after taking hits on foreign-currency loans in Hungary and euro zone sovereign debt.

The Austrian bank's shares were down 13 percent at 18.01 euros by 14:15 Sa time on Monday, compared with a 0.1 percent higher European banking sector .

“This is clearly disappointing news. In our view, today's announcement is likely to trigger a cycle of ratings downgrades and renew concerns over capital in the light of worsening operation environment in eastern Europe,” GFI Research said.

Chief Executive Andreas Treichl said Erste's core tier one capital ratio, a key measure of banks' financial strength, would end the year at 9.2 percent of risk-weighted assets, steady versus the end of 2010.

He said Erste had not been approached by regulators about joining a European push to recapitalise banks, nor did he believe Erste would have to take part in such an exercise.

KITCHEN SINK APPROACH

Erste scaled back and marked down to market values nearly all its exposure to the sovereign debt of struggling euro zone countries, changed the way it handles credit default swaps, and took big writedowns in Hungary and Romania.

The kitchen-sink approach and volatility on financial markets means Erste will delay for at least a year repaying 1.2 billion euros in non-voting capital which it got from Austria during the 2008 global banking crisis and skip a 2011 dividend.

The market had expected 2011 net profit of 967 million euros and a dividend of 70 cents per share, according to Thomson Reuters data.

Erste cut its sovereign exposure to Greece, Portugal, Spain, Ireland and Italy to 648 million euros as of the end of September and marked 95 percent of this down to market values.

That left its combined exposure to Greece and Portugal state debt at only 10 million euros.

But it faces a 500 million euro loss at its Hungarian unit, - which will now get up to about 600 million euros of new equity - following Hungary's move to let domestic borrowers repay foreign-currency loans at below market rates.

It will write down its entire 312 million euros in Hungary-related goodwill and boost risk provisions there by 450 million, while fighting the new law. Treichl said Erste had ruled out prospects of quitting Hungary despite the upheaval.

Austrian peer Raiffeisen Bank International also plans to inject capital into its Hungarian unit as a result of the controversial law, its finance chief was quoted as saying last week.

Raiffeisen, whose shares fell 7 percent, had no comment on Erste's moves.

Erste said slower-than-expected economic recovery in Romania meant it would have a 700 million euro pretax writedown of goodwill this year, leaving 1.1 billion in goodwill. It will inject 100 million euros of equity to the Romanian unit, Treichl said.

Treichl said his position as CEO was secure despite the problems in Hungary and Romania, two key planks of his central Europe expansion strategy that he said remained intact.

He said Erste had no choice but to take drastic action on its balance sheet given the environment in those two countries and the euro zone debt crisis.

“We have scant hope that there could be clear and decisive decisions soon on the future of Europe,” he said. - Reuters