Erste Group warns of economic slowdown in core CEE markets due to Russia links

Austria-based Erste Group Bank AG expects economic growth to deteriorate across all of its core markets in central and Eastern Europe in 2022 as a result of the secondary effects of the Ukraine war, CEO Bernhard Spalt said April 29.

The close links of most CEE economies to Russia, in particular their high dependency on oil and gas from the country, makes them vulnerable in the current geopolitical climate, Spalt said during a first-quarter earnings presentation.

"It's naïve to think that sanctions will only hit Russia," the CEO told analysts. While the Russian economy will be "put into a coma," economies in the West will suffer too, Spalt said.

Erste Group has downgraded its 2022 GDP growth expectations for all CEE countries where it operates, with the biggest cut made for the Czech Republic.

Soaring energy, food and commodity prices will push inflation rates to new highs in 2022. The Czech Republic is projected to have the highest level of inflation in the region.

Erste Group does not expect a significant change in income streams from the Czech Republic in 2022 despite the macroeconomic environment, Spalt said. The group's Czech business has performed well and stagflation — which is characterized by high inflation combined with high unemployment and stagnant demand — must persist in the market for at least two years to affect client behavior, the CEO said.

Czech mortgage demand has been slowing but is not expected to come to a full stop, CFO Stefan Dörfler said during the presentation.

Group outlook

The CEE economic slowdown will not affect Erste Group's overall 2022 performance targets, Spalt said. On the contrary, the bank upgraded its net interest income, or NII, and fee income growth outlook.

It now expects an NII growth rate in the high-single-digit percentage range in 2022, compared to the previously expected mid-single-digit growth rate. Fee income growth is now seen in the mid-single-digit percentage range, compared to the prior guidance for a low- to mid-single-digit increase in fees this year.

Erste Group's first-quarter net interest income surged 18.8% year over year to €1.39 billion, boosted by interest rate hikes in the Czech Republic, Hungary and Romania and strong loan growth across all markets. Net fee and commission income grew 14% year over year to €615.3 million.

In the first quarter, Erste Group's operating income rose 11.4% year over year to €2.04 billion while operating costs rose roughly 12% to €1.24 billion. The cost-to-income ratio edged up to 60.7% from 60.3% a year ago.

Despite the cost-to-income ratio increase in the first quarter, the bank expects operating income to grow faster than costs in 2022, bringing the ratio to the medium-term target of below 55% for the year.

Sberbank fallout

The cost increase was due to additional deposit insurance scheme contributions that Erste Group had to pay in Austria and Hungary related to the collapse of Sberbank Europe AG, Spalt said. Additional contributions were required from all banks involved in the deposit insurance systems in CEE markets where the European arm of Sberbank of Russia operated.

The Sberbank case could potentially open M&A opportunities in the CEE region, according to Spalt.

"If you look at situations like Sberbank, where possibly assets are being up for sale, then we have a situation which is quite positive," he said. Either Erste Group could purchase some of the assets at an "attractive price" or another institution could pick them up at a higher price, thereby lessening the burden on the deposit insurance systems, the CEO added.

Erste continues to monitor the markets for good M&A opportunities with a focus on its core CEE markets and Poland.

The group does not have subsidiaries in Russia, Ukraine or Belarus. The bank's gross credit exposure is "immaterial" at about €50 million.

A full portfolio screening showed a "limited impact on customers," with €6.4 billion, or 1.9%, of Erste Group's total of €338 billion of client credit exposure potentially directly affected through activities related to Russia, Ukraine or Belarus, the bank said.