BY TAKING A HAIRCUT Erste rids itself of sovereign debts

Shares of Austrian bank "Erste" fell almost 16% in Bucharest yesterday, after the bank announced it would take "extraordinary measures", booking net losses of about 800 million Euros for this year. Some of the announced measures include the change of the method for evaluating its portfolio of CDSs and of sovereign bonds and the drop in the book value of its holding in BCR Romania (700 million Euros) and Post-bank Hungary (312 million Euros).

Andreas Treichl, the CEO of Erste said:

"Our hopes that we will see a solution to the sovereign debt crisis in Europe have fallen considerably over the last two weeks. Because of this, we expect this situation to have an impact on the real economy, and on our region as well, even though to a lesser extent. In order to prepare Erste Group for an extended period of uncertainty we have taken radical steps on a balance sheet level".

The officials of "Erste" have announced yesterday that the bank would change the method for evaluating its CDS portfolio (Credit Default Swap), by marking it to market, (until now, they were valued at the acquisition value).

On September 30, 2011 "Erste" had an exposure to sovereign debt and bank risks (CDSs sold) of 5.2 billion Euros, of which 2.4 billion Euros exposure to other financial institutions, 2.8 billion Euros exposure to sovereign debt and approximately 0.7 billion Euros to banks and sovereign debt of Greece, Portugal, Spain, Ireland and Italy.

"Erste" officials have announced that the bank intends to sell these assets quickly.

As a result of the adjustment of its portfolio, "Erste" would post losses of 149 million Euros (for the financial years prior to the year 2010), 176 million Euros (for 2010) and 234 million Euros (for January-September 2011).

The officials of the bank have also said that "Erste" has significantly lowered its net sovereign, bank, corporate, and individual exposure to Greece, Portugal, Ireland, Spain and Italy, mostly as a result of the sale of assets, from 5.1 billion Euros at the end of 2010 to 3.6 billion Euros on September 30, 2011.

The investments of "Erste" in government bonds of Greece, Portugal, Ireland, Spain and Italy fell from 1.9 billion Euros to 0.6 billion Euros, the officials of the company have added.

The officials of "Erste" have also said that, without the impact of the extraordinary measures, it estimated a net profit of approximately 950 million Euros.

• The Spanish arm of Vienna

The shareholders of "Erste" include Spanish bank "La Caixa". In November 2009, it increased its stake in "Erste" to 10.1%, after reporting a stake of 5.1% in June 2009 and a cooperation agreement with the Austrian bank.

Also then, Juan María Nin, President and CEO of "la Caixa", was elected as a member of the Board of the Supervisory Board.

The cooperation agreement between the majority shareholder of Erste Group, the ERSTE Foundation, and the Criteria Caixa Corp, the investment vehicle of Caja de Ahorros y Pensiones Barcelona (la Caixa), of June 2009, involved granting each of the two institutions access to the other"s customers, on their respective markets.

"The forecasted cooperation would allow la Caixa to support its 10.6 million clients which have specific business interests in Central and Eastern Europe, while at the same time offering Erste Group access to individual and corporate clients in Spain", the two institutions were announcing on June 4th, 2009.

Criteria Caixa Corp also owns 30.1% of Banco Portugues de Investimento, which was downgraded on Friday by Moody"s.

"The main reason why Moodys" cut the sovereign ratings of debts and deposits of most of banks (ed. note: of Portugal) is the deterioration of their financing ability without outside support", the agency said. Moody"s had already cut the rating of Portugal by four notches to Ba2, in July.

Because of sovereign debt, Spain and Italy are now being targeted by ratings firms. On Friday, Fitch revised the ratings of Spain and Italy downwards.

In the beginning of August, ratings firm Moody"s Investors Service placed Spain on review for a potential downgrade. At the same time, Moody"s placed on review the ratings of the debts and deposits of five Spanish banks: "Banco Santander" SA, "CaixaBank", "Banco Bilbao Vizcaya Argentaria" SA, "La Caixa" and CECA.

In February, S&P downgraded "La Caixa" to A+/A-1, from AA-/A-1+ . (A.A.)

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• Adjustments of 939 million Euros in the bank"s stakes in Romania and Hungary

Austrian officials have yesterday announced the book downgrade of the stakes it owns in BCR, by 700 million Euros, up to 1.1 billion Euros, and in Postbank Hungary, by 312 million Euros (to 0 Euros). The officials of "Erste" have also said that the bank will setup provisions of 200 million Euros for its Hungarian operation.

In 2006, when "Erste" bought BCR, the bank had a goodwill of 2.4 billion Euros. Two years ago, the goodwill was adjusted to 1.8 billion Euros.

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• The evolution of EBS shares

Shares of EBS yesterday fell almost 16.68%, on the Bucharest Stock Exchange, after the announcement of the bank. The price of "Erste" recovered in the second half of the trading session, closing down 13.29%, to 78 lei/share.

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Petrel Pavel Szel, the president of SAI Muntenia, which manages SIF4, said: "There are banks that have been posting losses for years. The losses estimated by Erste are not the result of day-to-day operations, rather they are caused by some very clearly delineated activities which lead to the cleanup of its portfolio.

Is it better to take losses now and have some of the uncertainty disappear on the occasion of the opportunity of the cleanup of the balance sheet or it is better to go on with a burdened balance sheet?

Still, the losses estimated for 2011 equal the profit which the bank expected to make this year, in the absence of the announced measures, the bank"s capital will remain at a comfortable level, it is not affected, and the bank will not leave the solvency area.

Perhaps in other banks, the cleanup couldn"t have been sustained and it would have affected their capital.

We need to review the implications of the announcement made by Erste. We are "plugged in". We haven"t signed anything with Erste yet, aside from the General Conditions and the Principle agreement, but the negotiations concern details on the form of the documents anyway ".

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Ioan Cuzman, the chairman of SIF1: "Do you really think that the Romanian banking system is in any better shape? I don"t think that they are doing any better. The entire European system is in the same situation. The goal of Erste is to strengthen its portfolio, they are doing what they can in this situation. They are cleaning up their portfolio and that what everyone will have to do. We need to understand that the entire financial system needs to restructure itself".

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Costel Ceocea, the president of SIF "Moldova": "We have anticipated the unfavorable conditions of the financial sector and we have discussed it in the General Shareholder Meeting. The maximum limits of the negotiation are the press releases of September 14th and September 15th. The management of the SIFs may decide in the near future on the ratio between cash and Erste shares it will accept in exchange for the BCR shares".

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The growth of Austria"s GDP is expected to reach 3.3% this year, whereas for 2012, the prognosis is 2%, according to a report by the IMF. The unemployment rate is expected to reach 4.1%, in 2011 and 2012.

Austria"s gross debt, in terms of percentage of the GDP, is expected to reach 72.3% this year and 73.4% in 2012, according to IMF data.

Austria is one of the most solvent national economies, in the Eurozone. This includes countries which have a current account surplus, export capital and are therefore lender countries. Since these countries do not need foreign loans, they are not at risk of default.

In 2010, Austria was ranked fifth in the Eurozone in terms of the CEP Default Index (which gauges each country"s ability to pay foreign loans) , with a ratio of 6.9% (one of the best) as well as in terms of the NTE Index (which assesses the net total lending and borrowing of an economy, as well as the resources used to increase physical capital during a certain time frame) which reached the 3.4% level (which is very good).

Austria"s rating for long term debt is "AAA", according to ratings by "Standard&Poor"s" and "Fitch", whereas "Moody"s" rated it "Aaa". All of the aforementioned ratings have a stable outlook.

The rating of "Erste Group", for long term sovereign debt, is lower than that of Austria. "Standard&Poor"s" and "Fitch" gave "Erste Group" an "A" rating, and "Moody"s" gave it an "A1" rating. All of the ratings have a stable outlook.

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• Erste to boost the capital of BCR by 100 million Euros

By the end of the year, Erste Bank will boost the share capital of BCR by 100 million Euros, through a contribution in cash, according to the representatives of the Austrian group.

The general manager of Erste Bank, Andreas Treichl, yesterday said in a press conference that the share capital of Erste Bank will be increased by about 100 million Euros, in reply to a question on this matter.

According to Mediafax, the officials of Erste have said that the share capital increase will be performed by the end of this year and it is intended to maintain an adequate provision rate for non-performing loans.

Erste also said that the share capital increase will be accomplished using cash.