East European lender Erste Group Bank warned today it would make a net loss this year of up to €800 million and not pay a dividend after taking hits on its foreign currency loans in Hungary and euro zone sovereign debt.
The Austrian lender 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.
"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.
The kitchen sink approach and volatility on financial markets means Erste will delay for at least a year repaying €1.2 billion in non-voting capital which it got from Austria during the global banking crisis and skip a 2011 dividend, it said in a statement.
The steps will not trigger demand for more capital at group level, it said.
Due to a "continued strong underlying operating profitability" its core tier 1 capital solvency ratio was set to end 2011 at 9.2 per cent of assets, the same level as a year before.
The market had expected a 2011 net profit of €967 million 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 0.6 billion euros as of the end of September and marked 95 per cent of this down to market value levels. Its combined exposure to Greece and Portugal was only €10 million.
However, Erste Bank will suffer a €500 millionloss at Hungarian unit, which will now get about €600 million of new equity, following the local government's move to let its domestic borrowers repay their
foreign-currency loans at below market rates.
It will write down its entire €312 million in Hungary-related goodwill and boost risk provisions there by €450 million even while fighting the new law, it said.
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 more than 10 percent, had no immediate comment on Erste's moves.
Reuters
