“2006 was an excellent year for the Erste Bank Group and not just from a commercial perspective”, said Andreas Treichl, CEO of Erste Bank der oesterreichischen Sparkassen AG at the presentation of the preliminary results for financial year 2006, as shows the bank press release.
“Our acquisition of the Romanian market leader Banca Comerciala Romana and entry into the Ukrainian market represent two significant steps in our expansion strategy. In economic terms, our two main subsidiaries moved up a gear – with Èeská spoøitelna and Slovenská sporiteµòa increasing operating results by 20% and 12% respectively.
Despite the difficult economic environment Erste Bank Hungary was even able to encrease its operating result by more than 30%. The strong performance of our new Romanian subsidiary, BCR, is particularly pleasing. Its net profit for the year before restructuring costs rose by almost 38% to EUR 254 million”, said Treichl. “Against the backdrop of economic success, maintaining a balanced risk profile remains a key priority. Following Romania’s EU accession, 95% of our almost 16 million customers are now within the regula-tory framework of the EU”, concluded Treichl.
Business performance overview
With the 14.3% rise in Erste Bank Group’s operating income (+9.7% excluding BCR) significantly ex-ceeding the 10.3% increase in general administrative expenses (+6.3% excluding BCR), the operat-ing profit improved by 20.7% (+15.3% excluding BCR) from EUR 1,659.4 million to EUR 2,003.6 million.
The Group’s strong presence in the retail sector, even without the addition of BCR, was reflected in the extremely positive development of net interest income (+9.4%) and net commission income (+11.5%). The results from the insurance business were slightly down, due to market impact on securities valua-tions.
Demand for credit risk provisioning increased only moderately within the Group, up 4.2% from EUR 421.6 million to EUR 439.1 million. Excluding BCR, credit provisions remained almost unchanged (+2.2%).
The balance of other operating result and earnings from different categories of financial assets de-clined from EUR -16.1 million last year to EUR -42.3 million. This was primarily due to the new IFRS obligation to amortize goodwill relating to the acquired customer base of BCR. Excluding BCR, the re-sult was EUR -12.7 million, a slight improvement on 2005.
Net profit after minority interests increased by 30.1% from 716.7 million to 932.2 million, a record level for the Erste Bank Group (+26.2% to EUR 904.8 million excluding BCR). As the acquisition of Romanian market leader BCR was only completed on 12 October 2006, it just made a modest contribution to this record level.. Including restructuring costs and linear amortisation of customer relationship value , BCR’s net profit contribution amounted to EUR 27.4 million. “The overall positive result of BCR is the first sign of the additional potential created within our Group as a result of this acquisition”, said Treichl.
The capital increase to fund the BCR acquisition in 2006 led to an anticipated drop in return on equity, from 19.5% to 13.7%.
Earnings per share increased from EUR 2.98 to EUR 3.10 in 2006, despite the 25% increase in aver-age number of shares following the capital increase. Cash earnings per share stood at EUR 3.14 for the year 2006.
Total assets increased by 19.0% to EUR 181.7 billion in 2006 (+8.4% excluding BCR). This included increases of 20.8% in loans and advances to customers to EUR 97.1 billion (+11.3% excluding BCR), and 24.8% in amounts owed to customers (+ 14.8% without BCR).
The tier 1 ratio was 6.6% as of the end of 2006 (previous year: 6.8%); the solvency ratio was 10.3% (previous year: 11.0%), significantly above the statutory minimum of 8%.
Dividends
The Management Board will propose a dividend increase for financial year 2006 from EUR 0.55 to EUR 0.65 per share at the Annual General Meeting on 31 May 2007. “We are suggesting this increase of al-most 20% because we want our shareholders to participate adequately in the commercial success of our company”, explained CFO Reinhard Ortner. The new shares issued in 2006 are entitled to dividends for the whole of financial year 2006.
Outlook
Excluding the effect of the first-time consolidation of BCR, in 2006 Erste Bank Group was able to in-crease its net profit by 26.2% compared to 2005. In 2007, the Group targets 25% net profit growth with an increase of at least 20% planned for the years 2008 and 2009. Given the 70% increase in equity capi-tal in 2006, the planned return on equity for this year was 13%. The actual figure of 13.7% was above this level, bringing the Group a step closer to its ROE target of 18-20% in 2009.
Erste Bank will adopt Basel II regulations in the first quarter of 2007. This will not have a significant over-all impact compared to current regulations. However, adjustments will be seen in the Group’s individual segments. For example, a decrease in capital requirements for credit risk in the retail segment is ex-pected.
In addition to BCR, further drivers in 2007 will be the Ukrainian market entry as well as the acquisition of Diners Club in Croatia.
