"Erste" cleans up at BCR, to restore profitability

The large number of non-performing loans at the Romanian Commercial Bank (BCR) has attracted the attention of majority shareholder Erste Bank, which asked the new management of the bank, led by Tomas Spurny, to implement a process of transformation of the lender, which would make it profitable in 2013.

The officials of Erste Bank yesterday said, at the conference where the bi-annual results were announced, held in Vienna, that the process for the transformation of BCR will span two years, and the priority is to make the bank profitable, which involves the sale of the portfolio of non-performing loans, whose sudden increase could not be "digested" by the lender.

Andreas Treichl, CEO Erste Group, yesterday said that there will be cost cuts and that the situation of the Romanian and Hungarian subsidiaries of the bank is not good at all, as both are posting losses, but he expects the transformation process to yield results and the bank to become profitable next year.

Manfred Wimmer, CFO of Erste Group, yesterday said that the strategic plan of BCR is focused on improving profitability, by reducing non-performing loans.

He explained: "The Romanian subsidiary has a new management, which is trying to implement a strategic plan for the next two years. The priority is to reduce non-performing loans. We will change the collection methods, we will sell the portfolio of non-performing loans".

Aside from reducing non-performing loans, the strategy also comprises a review of the profitability of the network, as 40 branches have been shut down over the last few months. Still, this is not a goal in itself, as the bank wants to identify the areas with potential for growth in the medium and short term. Also, the new strategy will consider switching from lending in Euros to lending in lei.

Gernot Mittendorfer, CRO (Chief Risk Officer) Erste Group, explained that the increase in non-performing loans at BCR stems from a combination of factors.

He said: "The increase in non-performing loans at BCR is the result of a combination of factors: the economic situation, the drop of the real estate market, the austerity measures, the problems which appeared in the portfolio of inherited loans. These have led to a sudden increase. BCR did not have the necessary ability to deal with the sudden increase in the number of individual customers and companies, which began having trouble paying their loans in the context of the economic crisis. It took a while until we introduced the risk management standards of Erste upon acquiring the bank".

However, the bank currently has the staff and necessary procedures to support its troubled customers, according to him.

The portfolio has currently stabilized, and new loans have a better quality, Gernot Mittendorfer added.

Even though the ECB region was hit by the crisis, and the banking system was affected, Andreas Treichl doesn't think that banks in countries such as Romania or Poland should be sold.

He said: "If you can afford to think long-term, you don't sell a bank in countries such as Romania or Poland. It would be the most unwise decision you could make. I don't think anybody would sell a bank in the region if they didn't have to do that and I think that the situation will continue in the future, unless the crisis worsens dramatically".

As for the political situation in Romania, Andreas Treichl hopes that whoever leads the country will succeed in bringing it on the right path.

He said: "Romania has benefits and needs to take advantage of them.

It is easy for Romania to overcome the crisis much more successfully than other countries in Europe. Romania gets a lot of funds from Europe, but it urgently needs infrastructure. Also, the absorption of European funds is too slow and needs to be sped up. The fiscal situation and the macroeconomic indicators have improved".

• The profit of Erste Group - diminished by the losses of the Romanian and Hungarian divisions

In the first half of the year, the Erste Bank group did not post spectacular earnings in the first semester of this year, but considering the current economic context, it is a rather good result, Andreas Treichl, the CEO of the group said yesterday, at the bi-annual earnings call, held in Vienna.

The subsidiaries which brought down the group's profits were those of Romania and Hungary, which posted the weakest results among the countries in CEE, where the Austrian group is present.

He explained that the situation has deteriorated in operational terms, in all the central and Eastern European countries where the group is present.

The net profit of Erste Group, after the payment of minority interests fell 12.9% in the first semester, to 453.6 million Euros, compared to the similar period of last year, according to the earnings announced by the group. Adjusted to the extraordinary major effects, other than bank fees, the net profit was 350 million Euros.

The net interest income fell 1.9% in H1, to 2.65 billion Euros, amid the reduction of secondary assets and low demand for loans.

The net fees and commissions revenues fell 4.5%, to 865.5 million Euros, especially due to the weaker evolution of securities operations. Over the same period, net trading revenue fell from 288.8 million Euros in Q1 2011, to 121.5 million Euros in Q1 2012, as in the revaluation gains afferent to the first half of the year fell below last year's levels.

Operating revenues fell 6.7%, to 3.63 billion Euros. The efficient cost management has led to a decrease in overall overhead costs by 2.0%, to 1.88 billion Euros.

Operating profit reached 1.75 billion Euros.

The cost/risk ratio stood at 51.9%.

Risk costs increased 6.6%, to 981.8 million Euros in the first half of the year.

The ratio of non-performing loans (NPL) climbed from 8.5% on December 31st, 2011 to 9.2% at the end of H1 2012, and the rate of coverage of non-performing loans improved from 61%, to 61.2%.

Amid the increase in storage and investments in highly liquid assets, total assets increased 2.5%, to 215.2 billion Euros.

The loan/deposits ratio improved to from 113.3% at the end of 2011, to 109.6% on June 30 this year.

Core Tier 1 capital improved to 11.3 billion Euros (10.7 billion Euros at the end of 2011), which led to the increase of the Core Tier 1 ratio, according to the Basel requirements, to 10.4% (from 9.4% at the end of 2011).According to the methodology of the European Banking Authority, the Core Tier 1 ratio grew to 9.9% up from 8.9% at the end of 2011. After the inclusion of the reported profit, the Core Tier 1 ratio according to the EBA methodology stands at 10.4%. The continued improvement of the adequacy ratios was supported by the reduction of the risk weighted assets by 4.4%, to 109 billion Euros on June 30th (114 billion Euros on December 31st 2011). The bank's equity increased to 12.6 billion Euros (December 31st, 2011: 12 billion Euros).

Erste Group estimates that it will meet all the capital requirements (EBA, Basel 3) in a comfortable, sustainable manner, and on time, having a better liquidity when compared to most of its competitors.

The priorities of Erste Group for the rest of this year will be to keep the high capital adequacy as well as liquidity, and the strict cost management.