The increase of the provisions caused BCR to swing into the red

Last year, BCR saw a total loss of 1.2 billion lei (277 million euros), amid the increase of loan-loss provisions, by 68.2%, according to bank officials.

Manfred Wimmer, Erste Bank's Chief Financial Officer, acknowledges that the loss of BCR is great and can affect the way in which the bank is perceived by the population, but he says, however, that the shareholders of the credit institution are fully involved in supporting it.

The process of restructuring the subsidiary began in Romania is aimed at reducing inefficiencies, by reducing red tape, simplifying procedures and reducing distance between the levels at which decisions are made, said Manfred Wimmer, who believes that such a process could not be accomplished during the boom, because at the time, what mattered the most for banks was not to miss the moment. "Now, when growth is much slower than it was then, the quality of the products and services offered has become a lot more relevant," according to the banker.

BCR wants to remain the biggest bank in Romania and intends to become the main bank for its current customers, in other words, the one that they conduct all their activities through. "Whereas, in the past, we were OK with being the second or third bank for a client, to grant them a loan and stop there, we now want to be their main provider of financial services for them. We will review the relationships we have with each customer, and if they do fit with our wish, we will either try to get them to that point, or abandon them", Manfred Wimmer said.

• Manfred Wimmer: "We want the debt collection department of BCR to operate as a distinct company"

The organizational changes currently taking place at BCR seek to, among other things, make the Division in charge of restructuring and collecting the debts to operate as a separate company, according to Manfred Wimmer, the CFO of Erste.

"We want to separate the division dealing with the non-performing loans from the other divisions, so that the latter are able to grow the lending business, without having to deal with troubled portfolios," he said. The debt collection department of BCR, currently comprises about 500 people, most of them coming from within the bank.

In the last quarter of 2012, the credit institution has sold a portfolio of non-performing loans worth 74 million Euros, representing the bulk of the receivables sold by Erste during the period in question, which amounted to 212 million euros, according to a report from the Austrian financial group.

So far, no real estate properties have been sold, as priority was given to unsecured consumer loans, said Manfred Wimmer. As for the loans granted to companies, BCR has opted to create its own restructuring capabilities, because of the difficulty in reaching an agreement on the prices at which transactions should take place, he said.

"The sale of corporate loans is more complicated, considering the different approaches which debt collection companies have. Some prefer the piece-by-piece sale of the debtor, whereas others attempt a restructuring. We are trying to create the internal ability to handle these portfolios, instead of selling at prices that we perceive as undervalued", the CFO of Erste said.

The conversion into stock of the receivables that the banks hold in companies will need to be reviewed on a case by case basis, in the opinion of Manfred Wimmer, who went on to say that all the parties involved need to reach an agreement, and the direction of the borrowing company needs to be clear.

The banking system in our country is in the process of structural reform, necessary both in order to adjust to the new economic reality and the new model of growth, according to the representative of Erste.

"Whereas, before the crisis, growth was based on consumer and real estate loans, amid the increase in the real income of the population, now all those participating in the economy are more careful about how they spend funds, which leads to investments of a higher quality. The focus has shifted to the investments that create long-term value", Manfred Wimmer says. The normalization of economic indicators and the adjustment of the imbalances in the system create an environment conducive to investment and growth in our country, he considers. For the banking sector, the new economic reality is reflected in the legacy of the period of accelerated growth, consisting of non-performing loans, for which provisions must be set up, as well as the elimination of risks considered to be inadequate. One such step in that regard was the decision of BCR to stop granting loans denominated in foreign currency to the population, the official of Erste said.

• A 68.2% increase of the costs of provisions

Last year, BCR posted a net loss of 1.2 billion lei (277 million Euros), due to the 68.2% increase in the cost of provisions, from 3.62 billion lei (813.3 million Euros), as the operating result was 2.35 billion lei, close to the 2011 level.

In 2012, the operating result reached 2.35 billion lei (528.9 million Euros), down 3.3% from 2.43 billion lei (574.6 million Euros) in 2011.

In 2012, operating revenues fell slightly (2.2%), to 4.04 billion lei (906.3 million Euros), compared to 4.13 billion lei (974.3 million Euros) in 2011.

Operating expenses, which amounted to 1.68 billion lei (377.4 million Euros) in 2012 fell 0.8% compared to 1.69 billion lei (399.7 million Euros) in 2011, in spite of the significant restructuring expenses seen in Q4 2012.

According to the bank, the decline of the operating revenue was caused mostly by the weak demand for consumer loans, as well as by the low level of investment loans and working capital loans for companies, which impacted interest revenues, down 7.6% compared to the previous year, to 2.89 billion lei (648.6 million Euros) from 3.13 billion lei (738.0 million Euros). Net commission revenues increased 9.4% compared to last year, to 634.8 million lei (142.4 million Euros), from 580.1 million lei (136.8 million Euros) in 2011, mostly due to the higher transaction volumes. The net transaction volume increased 21.8%, namely 91.9 million lei compared to the previous year, adding 514.3 million lei (115.4 million Euros) to the revenues for the year 2012, mostly due to the gains from currency exchange trades and re-evaluations.

Despite the significant restructuring expenses, operating expenses fell 0.8% compared to the previous year, to 1.68 billion lei (377.4 million Euros), from 1.69 billion lei (399.7 million Euros) in 2011, due to the extensive optimization measures and the strict management of costs. The restructuring costs for the year 2012, including the predicted costs for 2013, were offset using the savings on staff, rent and building expenses, consulting, marketing. Thus, the cost-revenue ratio remained stable at 41.6% compared to 41% in 2011, in spite of the significant restructuring expenses incurred in 2012.

The net expenses with risk provisions for loans and advances granted to customers reached 3.62 billion lei (813.3 million Euros) in 2012, compared to 2.15 billion lei (508.0 million Euros) in 2011, reflecting the impact a weakened economy had on retail clients and companies, the press release by BCR says.

The rate of non-performing loans (NPL) was 26.7% of the total loan portfolio at the end of 2012, whereas the formation of new non-performing loans has dropped significantly, both in absolute and relative terms.

BCR is seeing the fourth consecutive quarter where the rate of coverage of non-performing loans has improved, currently at 58.6%, significantly higher than the value of 50.6% at the end of 2011.

The solvency ratio remains far above the regulatory requirements (a minimum of 10%) of the National Bank of Romania: 12.4% in December 2012 (BCR non-consolidated results, applying the IFRS with prudential filters). Also, tier 1 and 2 core capital ratio, at a value of 18.6% (December 2012, the BCR group, IFRS) clearly show the capital adequacy ratio of BCR and the continued support of Erste Group.

The aggregated volume of the loans granted to customers (prior to provisions, IFRS) has remained stable at 53.24 billion lei (11,979.5 million Euros), (-0.2%) compared to 53,376.3 million lei (12,346.2 million Euros) at the end of 2011, as the volume of new loans was affected by weak demand. The bank intends to focus on lending in lei, in order to reverse the structure of the mix of currencies in the loan portfolio over the medium and long term and to fully use its strong ability to self-finance in lei.

The amounts owed to customers have remained mostly steady, to 37.87 billion lei (8.52 billion Euros) at the end of December 2012 (-4.5% compared to the similar period of last year). Customer deposits remain the main source of financing for BCR, while the bank also enjoys the continued support of the parent bank, as well as various financing sources through the bonds issue of the MTN program.

The cost/revenue ratio has remained steady at 41.6% compared to 41% in 2011, due to the extensive optimization measures and the strict management of costs.

• Last year Erste recorded a net profit of 483.5 million Euros

Last year, after the payment of the minority interests, Erste had a net profit of 483.5 million de Euros. The executive committee will propose to the General Shareholder Meeting the payment of a dividend of 0.4 Euros/share for 2012 and the full payment of interest for the participation capital.

In 2012, net revenue interest fell to 5.235 billion Euros (down from 5.569 billion Euros in 2011), mostly due to the economic context and the low demand for loans, as well as due to the continuous decrease in secondary assets. The net fees and commission revenues fell from 1.787 billion Euros to 1.721 billion Euros, amid the weaker evolution of lending and the securities operations. Net trading revenues amounted to 273.4 million Euros, significantly higher than the previous year's result (122.3 million Euros).

The operating revenue reached 7.229 billion Euros (-3.3% compared to 7.478 billion Euros in 2011). The management of costs lead to the reduction of general overhead expenses by 2.4%, from 3,850 billion Euros to 3.756 billion Euros. This evolution led to an operating profit of 3.472 billion Euros (compared to 3.627 billion Euros in 2011). The cost/revenue ratio remained steady at 52.0% (compared to 51.5%, in 2011).

The risk costs had a positive trend and fell 12.7%, to 1.98 billion Euros, 148 basis points compared to the average level of the loans to customers (2011: 2.267 billion Euros, respectively 168 basis points). The level of provisions has diminished or remained steady for all the main markets, with the exception of Romania and Croatia. For the second consecutive quarter, the volume of non-performing loans fell, and the rate of non-performing loans has remained stable and reached 9.2% at the end of 2012 (December 31st 2011: 8.5%). The rate of coverage of non-performing loans has improved to 62.6% (December 31st, 2011: 61.0%).

The "other operating revenues" position has amounted to 724.3 million Euros (2011: -1.589 billion Euros). This significant improvement came amid the significant reduction of the extraordinary effects in 2012. Especially, the buyback of Tier 1 and 2 instruments had a positive contribution of 413.2 million Euros. The amortization of the commercial funds, of which 469.4 million Euros for BCR, had a negative impact. The bank taxes of Austria, Hungary and Slovakia had a negative impact of 244.0 million Euros (2011: 132.1 million Euros).

The equity has increased to 12.9 billion Euros (at the end of 2011 this was 12 billion Euros). The significant increase of the Core Tier 1 capital, from 10.7 billion Euros to 11.8 billion Euros at the end of the past year and the strong reduction of the risk-weighted assets, by 7.6%, from 114.0 billion Euros to 105.3 billion Euros, have led to the increase of the Core Tier 1 ratio, to 11.2% compared to the end of 2011, when it amounted to 9.4%.

The total assets have increased 1.8% compared to the end of 2011, to 213.8 billion Euros, mostly due to the increase in the deposits attracted from the core markets and the investments with a high level of liquidity. The volume of loans fell 2.1%, to 131.9 billion Euros.

Due to the extremely solid situation of the liquidity - customer deposits increased 3.5%, to 123.1 billion Euros, and the loan/deposit ratio fell from 113.3% to 107.2%, Erste repaid early 4 billion Euros out of the amounts used through the long-term refinancing program (LTRO) of the European Central Bank.