Erste - NII Miss But Other Figures Compensate

Erste - Instant Earnings Comment

Recommendation:  Accumulate (unch.)

Target price (12M): EUR 37.3 (unch.)

• Erste reported net income came to EUR 355 mln, in line with our forecast and above market est. of EUR 335 mln. The Bank booked EUR 151 mln related to Romanian legal provisions.
• NII disappointed the market as it grew by only 0.7% q-o-q and 3.3% y-o-y to EUR 1,169 mln (vs. expectation of EUR 1,187 mln) mainly due to lower margins in Other Austria, CZ and Hungary.
• Net F&C also improved somewhat by 2.5% but higher operating income (y-o-y +5.9%) was thanks to strong trading results.
• Cost-to-income came down to 56.6% in Q2 andin H1 it came below 60% vs. 61.5% in 2018. Y-o-y cost growth was 1.9%, showing some deceleration compared to the previous quarter. For the whole year, the Bank is within the range of market exp. related to cost inflation.
• NPL ratio was further down to 2.8% with coverage increasing slightly to 75.4%. Performing loan growth remained decent across the board (+7.7% y-o-y, +2.3% q-o-q), driven by all geographies, q-o-q by HU, HR and CZ. Loan-to-deposit ratio remained at comfortable 91.5%.
• Risk cost was again a contributor and the Bank changed its outlook to up to 10 bps thus there is an upside potential here if nothing changes in asset quality.
• Fully-loaded capital ratio came to 13.5%, including interim profit. The Bank put EUR 401 mln to retained earnings which could imply a DPS in the range of EUR 1.5, also anticipated by the market.
• Opinion: Erste disappoints on revenues, came beyond at costs and risk thus FY bottom line and ROTE guidance is expected to be achievable in our view. Should the Bank end up with zero risk cost again as last year and NII improves as mgmt expects, we even see upside risk in 2019 earnings. Moving forward, we admit revenues to be challenged by low rate environment, nevertheless in that case we expect volumes and asset quality to at least partially compensate. ECB rate cut is definitely a downside risk but a possible two-tiering system would mitigate the impact. We believe the ECB will go for this if it reduces interest rates further.
• All in all, Erste still offers 15% upside from the current share price and trades at PE of 2x and P/BV of 1.0, neither extremely cheap, nor expensive, thus we maintain our Accumulate rating on the stock.

 

 

 

 

Hai Thanh Le Phuong, CFA
Head of Research

CONCORDE SECURITIES LTD.

Hillside
55-61 Alkotás street, H-1123 Budapest.
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