Erste Group – 8th Capital Markets Day 9 December 2011, ViennaHungary: Road map to profitabilityRadovan Jelasity, CEO, Erst...
Disclaimer –Cautionary note regarding forward-looking statements− THE INFORMATION CONTAINED IN THIS DOCUMENT HAS NOT BEEN ...
Radovan Jelasity –Introduction of the new CEO− CEO of Erste Bank Hungary (since June 2011)− Governor of National Bank of S...
Presentation topics− Doing business in Hungary− Analysing the past: factors that led to record loss in 2011− The current s...
Doing business in Hungary –Operating in a very challenging environment                     Fragile economic outlook with ...
Presentation topics− Doing business in Hungary− Analysing the past: factors that led to record loss in 2011− The current s...
Foreign exchange lending in Hungary –FX lending went off track in Hungary− Foreign currency lending gained popularity     ...
Corporate business at EBH –Focus on gaining market shares led to NPL growth− SME business                                 ...
Presentation topics− Doing business in Hungary− Analysing the past: factors that led to record loss in 2011− The current s...
Where does the banking market stand now? –Update on the recent developments   Political/regulatory environment have become...
Where does EBH stand now? –Profit wiped out by risk provisions and state intervention− Operating performance has remained ...
Presentation topics− Doing business in Hungary− Analysing the past: factors that led to record loss in 2011− The current s...
New profile of EBH –Goals to be reached by implementing a new strategy                                       Independent, ...
EBH to become an efficient, standalone bank –Business model going through fundamental change                              ...
Strategic implications for EBH –Relationship bank focusing on customer experience               Retail business:          ...
Presentation topics− Doing business in Hungary− Analysing the past: factors that led to record loss in 2011− The current s...
Conclusion –Reaching net profit in 2014− Political reality requires a complete strategic rethinking    − Unstable and unpr...
Presentation topics− Doing business in Hungary− Analysing the past: factors that led to record loss in 2011− The current s...
Detailed update on early repayment at EBH –FX loan repayment scheme as per 7 December 2011            Erste Bank Hungary –...
Key local entity data (IFRS, consolidated) –Erste Bank HungaryKey figures and ratios                           1-9 11     ...
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Erste Group CMD11 - Hungary: Road map to profitability

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Doing business in Hungary − Analysing the past: factors that led to record loss in 2011 − The current situation: where do the market and EBH stand now? − Going forward: Road map to profitability − Outlook

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Erste Group CMD11 - Hungary: Road map to profitability

  1. 1. Erste Group – 8th Capital Markets Day 9 December 2011, ViennaHungary: Road map to profitabilityRadovan Jelasity, CEO, Erste Bank Hungary
  2. 2. Disclaimer –Cautionary note regarding forward-looking statements− THE INFORMATION CONTAINED IN THIS DOCUMENT HAS NOT BEEN INDEPENDENTLY VERIFIED AND NO REPRESENTATION OR WARRANTY EXPRESSED OR IMPLIED IS MADE AS TO, AND NO RELIANCE SHOULD BE PLACED ON, THE FAIRNESS, ACCURACY, COMPLETENESS OR CORRECTNESS OF THIS INFORMATION OR OPINIONS CONTAINED HEREIN.− CERTAIN STATEMENTS CONTAINED IN THIS DOCUMENT MAY BE STATEMENTS OF FUTURE EXPECTATIONS AND OTHER FORWARD-LOOKING STATEMENTS THAT ARE BASED ON MANAGEMENT’S CURRENT VIEWS AND ASSUMPTIONS AND INVOLVE KNOWN AND UNKNOWN RISKS AND UNCERTAINTIES THAT COULD CAUSE ACTUAL RESULTS, PERFORMANCE OR EVENTS TO DIFFER MATERIALLY FROM THOSE EXPRESSED OR IMPLIED IN SUCH STATEMENTS.− NONE OF ERSTE GROUP OR ANY OF ITS AFFILIATES, ADVISORS OR REPRESENTATIVES SHALL HAVE ANY LIABILITY WHATSOEVER (IN NEGLIGENCE OR OTHERWISE) FOR ANY LOSS HOWSOEVER ARISING FROM ANY USE OF THIS DOCUMENT OR ITS CONTENT OR OTHERWISE ARISING IN CONNECTION WITH THIS DOCUMENT.− THIS DOCUMENT DOES NOT CONSTITUTE AN OFFER OR INVITATION TO PURCHASE OR SUBSCRIBE FOR ANY SHARES AND NEITHER IT NOR ANY PART OF IT SHALL FORM THE BASIS OF OR BE RELIED UPON IN CONNECTION WITH ANY CONTRACT OR COMMITMENT WHATSOEVER.9 December 2011 8th CMDVienna 2 Hungary: Road map to profitability
  3. 3. Radovan Jelasity –Introduction of the new CEO− CEO of Erste Bank Hungary (since June 2011)− Governor of National Bank of Serbia (2004-2010) − Consolidation of the banking and insurance sector, including closure of 30 banks in 2001 and 24 insurance companies in 2004 − Reorganization of NBS by reducing workforce by 60% and closing 170 branches in 35 cities − Establishment of insurance, leasing and voluntary pension fund supervision within Central Bank − Represented Serbia at IMF and World Bank negotiations over 9 years− Vice Governor of National Bank of Serbia (2000-2003) − Restructured banking Supervision department − Developed and implemented banking resolution programme − Issued new licenses to strategic investors (banks) from the EU− Senior Associate at McKinsey & Company, Frankfurt (1999-2000) − Worked on various short and mid-term projects in Germany, Poland and Bulgaria, mainly in the banking industry (mortgage finance, hostile takeover, restructuring, corporate strategy) − Prepared largest IPO in Germany in 2000− Relationship Manager at Deutsche Bank AG, Frankfurt (1995-1999) − Assisted in the development of the bank‘s strategy in CEE − Relationship management with over 100 banks from former Yugoslavia9 December 2011 8th CMDVienna 3 Hungary: Road map to profitability
  4. 4. Presentation topics− Doing business in Hungary− Analysing the past: factors that led to record loss in 2011− The current situation: where do the market and EBH stand now?− Going forward: Road map to profitability− Outlook− Appendix.9 December 2011 8th CMDVienna 4 Hungary: Road map to profitability
  5. 5. Doing business in Hungary –Operating in a very challenging environment  Fragile economic outlook with growth lagging behind CEE peersMacroeconomy  Moody’s recently downgraded HU to non-investment grade (S&P, Fitch negative outlook) x  Imbalanced political landscape where governing party has two-third majorityPolitics   Unstable regulatory environment – accidental passing of laws, no harmonization with respective EU institutions, no constructive dialogue Uncertainty driven by unorthodox measures, no cooperation with IMF and EU yet x  Highest banking tax in Europe (0.53% of balance sheet)Banking market   FX early repayment act (total sector loss estimated at EUR 600-700mn) Nationalisation of pension funds (approximately 10% of GDP) xCompetition  All major banks have been heavily hit by the unorthodox measures of the government xErste BankHungary  Government decisions and need for additional provisioning have led to record loss in 2011 x   Strong retail basis of about 0.9mn clients of which 40% are under 40 yearsOutlook for EBH  Expected to be profitable in 2014 based on new strategy9 December 2011 8th CMDVienna 5 Hungary: Road map to profitability
  6. 6. Presentation topics− Doing business in Hungary− Analysing the past: factors that led to record loss in 2011− The current situation: where do the market and EBH stand now?− Going forward: Road map to profitability− Outlook− Appendix.9 December 2011 8th CMDVienna 6 Hungary: Road map to profitability
  7. 7. Foreign exchange lending in Hungary –FX lending went off track in Hungary− Foreign currency lending gained popularity Development of FX-denominated loans mainly due to lower monthly instalments… 80% − Substantial interest rate difference between HUF and 62% 62% 63% CHF or EUR rates (~5%) due to high HUF rates 60% 53% − Most FX-based loans were granted in 2005-2008 39% 43% 37% 38% 38% 40%− … and led to a very distorted banking market 29% 21% − As opposed to some other CEE countries, 20% 17% Hungarians have very limited FX savings− FX mortgage lending was abolished from Q2 0% 2005 2006 2007 2008 2009 2010 2010 FX-loans as a % of GDP FX-loans as a % of customer loans Loan/Deposit ratio Annual growth of FX-denominated loans 500% 442% 120% 387% 401% 96% 100% 84% 400% 343% 286% 80% 300% 236% 61% 58% 60% 200% 130% 141% 136% 141% 40% 27% 112% 119% 20% 24% 100% 20% 12% 11% 1% 80% 85% 77% 67% 66% 67% 0% 0% -5% -1% 2005 2006 2007 2008 2009 2010 -20% 2005 2006 2007 2008 2009 2010 Customer Loan/Deposit ratio FX Loan/Deposit ratio HUF Loan/Deposit ratio FX-retail loan growth FX-corporate loan growth9 December 2011 8th CMDVienna 7 Hungary: Road map to profitability
  8. 8. Corporate business at EBH –Focus on gaining market shares led to NPL growth− SME business EBH: SME lending − Very sensitive to macroeconomic development − Relatively high proportion of HUF loans (65%) 3,000 40% 2,500 2,299 2,312 2,319 2,301 2,274 − Continuously rising risk costs 30% in EUR million 22.8% 26.1% 2,000 18.1% 1,500 15.8% 20% 13.7%− Municipality business 1,000 10% − Close to half of loans/bonds in CHF 500 0 0% − State taking over debt from counties Sep 10 Dec 10 Mar 11 Jun 11 Sep 11 Loans NPL ratio− Real estate business EBH: Municipality lending − Booming developments before the crisis − Current low demand and high vacancies have 500 20% 421 432 led to elevated NPL (31%) 384 389 394 400 15% in EUR million 300− Large Corporate business 10% 200 − Small but profitable segment 4.4% 3.8% 5% 100 0.6% − Relatively high crisis resistance 0.2% 0.2% 0 0% − High competition, low margins Sep 10 Dec 10 Mar 11 Jun 11 Sep 11 Loans NPL ratio9 December 2011 8th CMDVienna 8 Hungary: Road map to profitability
  9. 9. Presentation topics− Doing business in Hungary− Analysing the past: factors that led to record loss in 2011− The current situation: where do the market and EBH stand now?− Going forward: Road map to profitability− Outlook− Appendix.9 December 2011 8th CMDVienna 9 Hungary: Road map to profitability
  10. 10. Where does the banking market stand now? –Update on the recent developments Political/regulatory environment have become a major profitability driver Direct impact Indirect impact Potential threats • Highest banking tax in • Weakening HUF, higher • Extension of FX early Europe (0.53% of bank’s CDS due to lack of repayment balance sheet) credibility • Loss due to FX early • Moody’s downgrade to • Municipality FX repayment act (total sector non-investment grade - > denominated loans loss forecasted: EUR 600- base rate hike to 6.5%, 700mn) higher funding costs • Government review of PPP • Nationalisation of pension • Unemployment rate above investments funds (EUR 9bn, ~10% of 10% - > impact on NPL GDP) • Further unorthodox • Zero GDP growth expected measures • Regulatory restrictions in 2012, keeping loan demand at low level • Quarterly quota on foreclosures9 December 2011 8th CMDVienna 10 Hungary: Road map to profitability
  11. 11. Where does EBH stand now? –Profit wiped out by risk provisions and state intervention− Operating performance has remained strong Operating performance − Stable net interest margin (4.4% as of Sept 2011) 600 508 − 0.9mn client base 500 434 470 381 391 − Strong brand recognition 400 306 in EUR million 300 256 233 210 173 200− 2011 net loss expected at about EUR 550mn 100 c − Risk provisions driven by portfolio deterioration and 0 -100 additional provisions related to FX conversion (total -200 (158) of EUR 450mn) -300 (207) (224) (214) (203) − Excessive bank tax (approx. EUR 45mn) 2007 2008 2009 2010 1-9 2011 Operating income Operating expenses Operating result Risk provisions Net profit 800 200 701 109 77 58 600 0 in EUR million in EUR million (22) 400 -200 244 171 200 -400 60 73 0 -600 (532) 2007 2008 2009 2010 1-9 2011 2007 2008 2009 2010 1-9 20119 December 2011 8th CMDVienna 11 Hungary: Road map to profitability
  12. 12. Presentation topics− Doing business in Hungary− Analysing the past: factors that led to record loss in 2011− The current situation: where do the market and EBH stand now?− Going forward: Road map to profitability− Outlook− Appendix.9 December 2011 8th CMDVienna 12 Hungary: Road map to profitability
  13. 13. New profile of EBH –Goals to be reached by implementing a new strategy Independent, (minimize parent funding, lower loan-to-deposit ratio, ability to raise sufficient HUF) well diversified, (more balanced NII and fee income, lower dependence on mortgage loans, close asset/liability market share gap) and sustainably profitable bank (well managed risk costs, aggressive work-out, ongoing efficiency gains) with a new strategy and clear vision. (complete repositioning of EBH)9 December 2011 8th CMDVienna 13 Hungary: Road map to profitability
  14. 14. EBH to become an efficient, standalone bank –Business model going through fundamental change Self funding Focus on Efficiency Risk management (mid-term) WO/collection • Reduction of branch • Focus on savings • Centralized credit risk Corporate workout: network from 184 to (Building Society, management • Restructure the 141 by the end of H1 investments, deposit) corporate workout 2012 department • More restrictive (DBA, • Increase capacities, • Issuance of HUF LTV) lending only to introduce a new IT • Around 15% bonds and mortgage active retail clients system workforce reduction bonds • Bonus driven salary scheme in branches and • Improvement of an subsidiaries • Substantial reduction early warning system of parent funding Retail workout: • Around 20% • Merge retail and reduction of other leasing workout, costs items review relationships (Marketing, IT, etc.) with collection agencies • Extend activities over • Integration of 180+ DPD subsidiaries (Leasing, • Implement a more Factoring) proactive resolution approach9 December 2011 8th CMDVienna 14 Hungary: Road map to profitability
  15. 15. Strategic implications for EBH –Relationship bank focusing on customer experience Retail business: Corporate business: Relationship bank instead of lending only Selective client focus with efficient operation− Termination of cooperation with external loan − Business focus agents already in Q3 2011 − Selective mid-sized and large corporates − Concentration on export-driven companies − Focus on subsidiaries of Austrian/German firms− Reduction of branches and employees − Complete redesign of small/micro approach − 43 branches will be closed (out of 184 branches) − New motivation scheme − Closure of oversized branches − Transaction focus− Client activation − Focus on fee based products − Aggressive acquisition of new “salary clients” − Concentrate on cash management, factoring and − Activation of existing (borrowing) clients plain structured trade finance− Focus on strategic partnerships − Efficiency − Introduction of automated lending workflow process − Supershop program − Redesign of commercial centres model with stronger − Extended cooperation with the Hungarian Post responsibility for client relationship and sales− Enhance customer experience − Organization − Targeted service levels to be defined − Centralized Real Estate business, replacement of under-performing mid-management9 December 2011 8th CMDVienna 15 Hungary: Road map to profitability
  16. 16. Presentation topics− Doing business in Hungary− Analysing the past: factors that led to record loss in 2011− The current situation: where do the market and EBH stand now?− Going forward: Road map to profitability− Outlook− Appendix.9 December 2011 8th CMDVienna 16 Hungary: Road map to profitability
  17. 17. Conclusion –Reaching net profit in 2014− Political reality requires a complete strategic rethinking − Unstable and unpredictable environment often driven by government actions− Business decisions have also contributed to 2011 performance − Imbalanced business model with main focus on FX lending− Strategic repositioning of Erste Bank Hungary − Termination of cooperation with external loan sales agents in Q3 2011 − Relationship bank instead of lending only − Focus on local currency business from locally sourced liquidity − Reduce dependence on parent bank funding − 15% headcount reduction in 2012 − Network reduction by 43 branches in 2012− Mid-term goals to be achieved: − Savings banks orientated business model − Balanced loan to deposit ratio − Profitability to return in 2014 based on new strategy9 December 2011 8th CMDVienna 17 Hungary: Road map to profitability
  18. 18. Presentation topics− Doing business in Hungary− Analysing the past: factors that led to record loss in 2011− The current situation: where do the market and EBH stand now?− Going forward: Road map to profitability− Outlook− Appendix.9 December 2011 8th CMDVienna 18 Hungary: Road map to profitability
  19. 19. Detailed update on early repayment at EBH –FX loan repayment scheme as per 7 December 2011 Erste Bank Hungary – Erste Bank Hungary – Update on the number of involved clients Update on loan amounts in EUR million 35,000 33,672 250 209 30,000 200 25,000 150 20,000 15,000 12,982 100 9,093 64 10,000 50 5,000 0 0 # of # of clients # of clients Repaid loans Accepted loan interested made repaid application clients declaration9 December 2011 8th CMDVienna 19 Hungary: Road map to profitability
  20. 20. Key local entity data (IFRS, consolidated) –Erste Bank HungaryKey figures and ratios 1-9 11 1-9 10 Rate and margin environmentCost/income ratio 39.6% 39.4%Return on equity n.a. 2.0% Sep 11 Dec 10 Change 270% 12%Erste Group stake 99.94% 203.4% 203.1% 10% 177.6% 184.4% 177.5%Solvency ratio 12.7% 12.4% 180% 6.0% 6.1% 8% 5.8% 6.0%Employees 2,972 2,900 2.5% 5.3% 6%Branches 184 184 0.0%Customers (in m) 0.9 0.9 5.2% 90% 4% 4.4% 4.4% 4.0% 4.1% 4.4%Market share - retail loans 14.5% 14.1% 2%Market share - retail deposits 8.3% 7.7% 0% 0%Market share - corporate loans 8.9% 8.9%Market share - corporate deposits 7.2% 6.7% Sep 10 Dec 10 Mar 11 Jun 11 Sep 11Market share - total assets 8.8% 8.8% Loan/deposit ratio (eop) 1m LCY market rate (eop) Net interest margin (ytd)in EUR million 1-9 11 1-9 10 Change in EUR million Sep 11 Dec 10 ChangeNet interest income 313.4 306.1 2.4% Loans and advances to credit institutions 368 404 (8.9%)Risk provisions for loans and advances (339.9) (184.6) 84.1% Loans and advances to customers 8,055 7,706 4.5%Net fee and commission income 78.9 80.1 (1.5%) Risk provisions for loans and advances (744) (455) 63.5%Net trading result 34.8 40.9 (14.9%) Financial assets - at fair value through profit or loss 0 0 naGeneral administrative expenses (169.2) (168.2) 0.6% Financial assets - available for sale 351 109 >100.0%Other operating result (57.5) (48.8) (17.8%) Financial assets - held to maturity 1,113 1,059 5.2%Result from financial assets - FV 0.0 0.0 na Other assets 1,886 1,379 36.8%Result from financial assets - AfS 0.0 0.0 na Total assets 11,030 10,201 8.1%Result from financial assets - HtM 0.0 0.0 na Interest-bearing assets 9,143 8,822 3.6%Pre-tax profit from continuing operations (139.5) 25.5 na Deposits by banks 5,439 5,171 5.2%Taxes on income (11.7) (16.3) (28.2%) Customer deposits 4,538 3,794 19.6%Post-tax profit from continuing operations (151.2) 9.2 na Debt securities in issue 17 83 (79.6%)Post-tax profit from discontinuing operations 0.0 0.0 na Other liabilities 649 622 4.4%Net profit for the period (151.2) 9.2 na Total equity 387 531 (27.1% ) Attributable to non-controlling interests (0.3) (0.1) >100.0% Attributable to non-controlling interests (0) (0) >100.0% Attributable to owners of the parent (150.9) 9.3 na Attributable to owners of the parent 387 531 (27.1% )EUR FX rate (ave) 271.3 271.3 EUR FX rate (eop) 292.6 292.6*) To eliminate currency effects, 1-9 11 exchange rates were used for P&L and balance sheet conversion. Market share data is as of Sep 20119 December 2011 8th CMDVienna 20 Hungary: Road map to profitability

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