Erste Group takes extraordinary charges with limited impact on core capital
The management board of Erste Group has today decided on a number of measures that affect the presentation of its CDS portfolio, its Hungarian and Romanian operations, and result in the uniform application of the effective interest rate method across the group.
- Erste Group has cut its sovereign exposure to Greece, Portugal, Spain, Ireland and Italy from EUR 1.9 billion at year-end 2010 to EUR 0.6 billion at 30 September 2011. 95% of this exposure is marked to market as at 30 September 2011. At the same time the combined sovereign exposure to Greece and Portugal declined to about EUR 10 million. In addition, Erste Group changes the presentation of its CDS portfolio (protection sold) from amortised cost to market values, leading to a one-off cumulative chargeagainst shareholders' equity of EUR 280 million for the years prior to 2011. The impact on the 1-9 2011income statement (profit and loss account) amounts to about EUR 180 million (post-tax).
- Erste Group will write down its entire Hungary-related goodwill in the amount of EUR 312 million pre-tax (EUR 312 million post-tax). Furthermore, Erste Group will take charges for additional risk provisions totalling EUR 450 million pre-tax (EUR 450 million post-tax). This is due to unprecedented government intervention in the Hungarian banking market, an increase in the target NPL coverage ratio and a deterioration in asset quality. The goodwill impairment does not impact regulatory capital or tangible equity.1
- Erste Group will partially write down its Romania-related goodwill by EUR 700 million pre-tax (EUR 627 million post-tax) to reflect the slower than expected economic recovery. This measure does not impact regulatory capital or tangible equity. Following a successful buyout of the SIF minority shareholders - as announced on 14 September 2011 - the remaining goodwill will be supported by a substantially larger share of BCR's cash flow.
- In anticipation of IFRS 9 implementation, Erste Group will align the effective interest rate models used across the group, leading to a cumulative one-off charge against shareholders' equity of about EUR 210 million, as a result of recognising income over the life of a loan, rather than at the time of payment. This amount will be recouped through the income statement over the life of the loans. The impact on the 1-9 2011 income statement is about EUR 10 million (post-tax).
- Based on the above, Erste Group is set to report a net loss of about EUR 920-970 million in 1-9 2011. Adjusted for extraordinary charges (excluding the banking taxes in Austria and Hungary) Erste Group expects to post a net profit of about EUR 700 million in 1-9 2011. Due to the continued strong underlying operating profitability, Erste Group's core tier 1 ratio (total risk) at year-end 2010 of 9.2% is expected to be unchanged at year-end 2011.
- In response to the significantly deteriorated outlook for the euro zone economies and as a precautionary measure Erste Group will postpone the early repayment of the state portion of the participation capital (EUR 1.2 billion) by at least one year. The management board of Erste Group will propose to the AGM not to pay a dividend for FY 2011 but to continue servicing participation capital.
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