Erste Bank (ERST.VI)
Too far, too fast: Downgrading to Hold
Outperformer — Erste Bank has outperformed Raiffeisen International by c
40% over the past three months. We attribute outperformance to positive
sentiment following the announcement that the bank was able to secure
State support for an issue of non-dilutive tier 1 eligible participation capital
and hybrid tier 1 capital.
Risk sentiment improves in key markets — Erste’s shares have benefited
from an improvement in risk appetite that was reflected by a rally in regional
bank shares, which like Erste, have increased in value by c 40% in US$
terms over the past three months, but also by appreciating currencies in
2Q09. Erste’s 2Q09 results are likely to be positively impacted by the strong
appreciation of the Czech Koruna and the Hungarian Forint in 2Q09.
Austrian the "hidden danger" — Following a relatively downbeat assessment
of the outlook for the Austrian economy we are concerned that we may have
underestimated the risks facing the bank from its home business, especially
following a relatively downbeat assessment provided by the OECD for the
Austrian economy recently. We have increased our peak NPL forecasts to
10% from 9% for the Savings Bank division and to 9% from 8% for Erste
Bank’s Austrian retail division. This has also prompted us to increase our
provisioning forecasts for both divisions.
Maintaining Bearish View on CEE NPLs — We reiterate our previous bearish
view on the outlook for CEE NPLs, which we expect to peak at 12.5%, up
from 4.8% as of end 1Q09.
Model Tweaked — The expectation of higher loan loss provisions next year,
namely in the Austrian divisions, has led us to lower our earnings forecasts
by 10.8% next year and by 10.1% in 2011. Our 2012 forecasts, which also
are the basis for our valuation, have been revised downwards by a negligible
1.4%. Our 2009 earnings estimates remain unchanged.
Downgrading to Hold — Following the recent strong share price performance
and concerns with asset quality surprises from the Austrian business, we
lower our rating on the share to Hold/High Risk (2H) from Buy/High Risk
(1H). Our target price remains unchanged at €20 per share.
(8)
