Bancherul - BANCI / ENGLISH / Erste Group increases Q1 2011 net profit to EUR 260.6 million on lower risk costs

HIGHLIGHTS:

- Net interest income amounted to EUR 1,295.7 million in the first quarter 2011 (-2.1% versus Q1 2010). This was in part due to a slight decrease in the net interest margin to 2.88% (versus 3.03% in Q1 2010), which was attributable to a marginally changed balance sheet structure, as well as continued low market interest rates.

- Net commission income grew by 2.1% to EUR 481.2 million in the first quarter of 2011, driven by increased fees from securities business and payment transfers.

- The net trading result remained flat at EUR 139.7 million (-1.1%).

- Operating expenses: On the back of ongoing tight cost control and despite rising inflation, operating expenses remained stable in the first quarter 2011 at EUR 963.0 million (+1.0%, currency-adjusted +0.3%). This resulted in a cost/income ratio of 50.2% (compared to 49.2% in Q1 2010).

- Risk costs declined by 13.4% from EUR 531.2 million (164 basis points of average customer loans) in Q1 2010 to EUR 460.1 million or 138 bps, respectively, in the first quarter of 2011. This development was primarily due to the gradual economic recovery − albeit at different pace in various countries − in Central and Eastern Europe. The NPL ratio in relation to customer loans remained stable at 7.7% at the end of the first quarter of 2011 (year-end 2010: 7.6%). The NPL coverage ratio improved to 61.4%, compared to 60.0% at year-end 2010.

- Net profit after minorities rose to EUR 260.6 million in the first quarter of 2011, up 2.1% year-onyear.
In light of the extraordinary charges of EUR 47.9 million (pre-tax) for banking taxes in Austria and Hungary, this was a very satisfactory performance.

- The loan-to-deposit ratio continued to improve, 111.4% at 31 March 2011 (31 December 2010: 113.4%), driven by increased customer deposits (+1.9% to EUR 119.2 billion) with loan demand remaining subdued. Otherwise, the growth in total assets, up 3.7% to EUR 213.5 billion, was principally related to higher interbank business volumes in the first quarter of 2011.

- Erste Group’s shareholders’ equity2 improved further in the first quarter 2011 to EUR 14.1 billion, mainly due to the increased net profit. In line with the still moderate loan growth, risk-weighted assets remained flat at EUR 119.8 billion versus year-end 2010. Prior to the inclusion of retained earnings, this resulted in a tier 1 ratio (total risk) of 10.4%, compared to 10.2% at year-end 2010 and a core
tier 1 ratio (total risk) of 9.4% (year-end 2010: 9.2%).

“Erste Group has made a good start to the new financial year, posting an increase in net profit as a result of declining risk costs and despite the significant negative impact from the banking taxes in Austria and
Hungary”, said Andreas Treichl, CEO of Erste Group Bank AG, at the presentation of the first quarter 2011 results, cited in a press release.

“Overall, macroeconomic fundamentals in Central and Eastern Europe, as well as sentiment towards the region, continued to improve. This was reflected in significantly increased industrial output together with currency appreciation as well as a tightening in CDS spreads”, Treichl continued. “While Romania and Hungary continued to work through economic issues and are not expected to show meaningful improvements before the second half of 2011, the performance in the Czech Republic, Slovakia and Austria (the markets which account for roughly two thirds of total business volumes) makes us confident about our ability to significantly raise profitability again this year”, Treichl concluded.

Earnings performance in brief

In the first quarter of 2011, operating income decreased slightly while operating expenses grew moderately, causing the operating result to decline to EUR 953.6 million (3.0% down on EUR 983.2 million in the first quarter 2010 and 0.6% down on EUR 959.5 million in the fourth quarter 2010).

First quarter 2011 operating income amounted to EUR 1,916.6 million versus EUR 1,936.3 million in the first quarter 2010. This 1.7% decline was attributable mainly to lower net interest income (-2.1%, from EUR 1,323.6 million to EUR 1,295.7 million), which was not fully offset by the rise in net fee and commission income (+2.1%, from EUR 471.5 million to EUR 481.2 million). The net trading result of EUR 139.7 million remained almost unchanged year-on-year.

As general administrative expenses increased by 1.0% from EUR 953.1 million to EUR 963.0 million, the cost/income ratio rose to 50.2% (first quarter of 2010: 49.2%).

Net profit after minorities improved by 2.1% from EUR 255.2 million to EUR 260.6 million. Cash return on equity, i.e. return on equity adjusted for non-cash expenses such as goodwill impairment and straight-line amortisation of customer relationships, decreased from 8.1% (reported
ROE: 7.8%) in the first quarter of 2010 to 7.8% in the first quarter of 2011 (reported ROE: 7.5%).

This was largely due to the broader equity base, which rose by more than 5% (average shareholders’ equity in the first quarter of 2010: EUR 13.0 billion; first quarter of 2011: EUR 13.8 billion).

Cash earnings per share equalled EUR 0.63 in the first quarter of 2011 (reported EPS: EUR 0.60), up slightly on the first quarter of 2010 (EUR 0.62; reported EPS: EUR 0.59). Total assets rose by 3.7% to EUR 213.5 billion versus year-end 2010, driven mainly by the expansion of
interbank transactions.

Alongside a decline in risk-weighted assets, the solvency ratio improved from 13.5% at year-end 2010 to 13.8% as at 31 March 2011. Therefore, the level remained comfortably above the statutory minimum requirement of 8.0%. The Tier 1 ratio in relation to the total risk was 10.4% as at 31 March 2011 (versus 10.2% at year-end 2010).