Erste Group: Resilient Earnings Leave Shares Attractive

seekingalpha04-12

Austrian bank Erste Group has performed well since my previous coverage last summer, outperforming wider European financials by around 15ppt following strong 2023 earnings and guidance.2024 profit ...

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}\n.meta {color:#5e5c6d;font-size:13px;margin:0 0 .5em; }\na{text-decoration:none; color:#2a4b87;}\n.meta .head { display: inline-block; overflow: hidden}\n.head .h-thumb { width: 30px; height: 30px; margin: 0; padding: 0; border-radius: 50%; float: left;}\n.head .h-content { margin: 0; padding: 0 0 0 9px; float: left;}\n.head .h-name {font-size: 13px; color: #eee; margin: 0;}\n.head .h-time {font-size: 11px; color: #7E829C; margin: 0;line-height: 11px;}\n.small {font-size: 12.5px; display: inline-block; transform: scale(0.9); -webkit-transform: scale(0.9); transform-origin: left; -webkit-transform-origin: left;}\n.smaller {font-size: 12.5px; display: inline-block; transform: scale(0.8); -webkit-transform: scale(0.8); transform-origin: left; -webkit-transform-origin: left;}\n.bt-text {font-size: 12px;margin: 1.5em 0 0 0}\n.bt-text p {margin: 0}\n</style>\n</head>\n<body>\n<div class=\"wrapper\">\n<header>\n<h2 class=\"title\">\nErste Group: Resilient Earnings Leave Shares Attractive\n</h2>\n\n<h4 class=\"meta\">\n\n\n2024-04-12 22:26 GMT+8&nbsp;&nbsp;&nbsp;<a href=https://seekingalpha.com/article/4683461-erste-group-resilient-earnings-leaves-shares-attractive><strong>seekingalpha</strong></a>\n\n\n</h4>\n\n</header>\n<article>\n<div>\n<p>Austrian bank Erste Group has performed well since my previous coverage last summer, outperforming wider European financials by around 15ppt following strong 2023 earnings and guidance.2024 profit ...</p>\n\n<a href=\"https://seekingalpha.com/article/4683461-erste-group-resilient-earnings-leaves-shares-attractive\">Source Link</a>\n\n</div>\n\n\n</article>\n</div>\n</body>\n</html>\n","isBrief":false,"type":0,"news_type":1,"symbol":"BK4207","symbol_name":"综合性银行","start_time":0,"source_url":"https://seekingalpha.com/article/4683461-erste-group-resilient-earnings-leaves-shares-attractive","article_id":"2426899735","we_media_id":null,"thumbnails":[],"rights":null,"url":"https://stock-news.laohu8.com/highlight/detail?id=2426899735","pubTimestamp":1712932005,"sourceInfo":{"source_id":"seekingalpha","name":"Seeking Alpha"},"weMediaInfo":null,"summary":"Austrian bank Erste Group has performed well since my previous coverage last summer, outperforming wider European financials by around 15ppt following strong 2023 earnings and guidance.2024 profit gui","collect":0,"end_time":0,"defaultTopTitle":"seekingalpha.com","property":[],"viewcount":null,"language":"en","relate_stocks":{"BK4207":"综合性银行","EBKDY":"Erste Group Bank AG","EBKOF":"Erste Group Bank AG","EUFN":"欧洲金融指数ETF-iShares MSCI"},"translate_title":"Erste集团：弹性收益让股票更具吸引力","themeId":null,"isJumpTheme":false,"ttsUrl":null,"symbols_score_info":{"EBKDY":1,"EBKOF":1,"EUFN":1},"content_text":"Austrian bank Erste Group has performed well since my previous coverage last summer, outperforming wider European financials by around 15ppt following strong 2023 earnings and guidance.2024 profit guidance looks bullish given where we are in the cycle, with the bank guiding for a strong 15% return on tangible equity.At around 1x tangible book value, Erste shares remain attractive and offer solid capital return potential too.   Goran Jakus Photography/iStock Editorial via Getty ImagesShares of Austrian bank Erste Group (OTCPK:EBKDY)(OTCPK:EBKOF) have done well since I last covered them back in June 2023, with the ADSs delivering meaningful outperformance versus European financials (EUFN) following a ~40% total return in that time. Performance has been roughly the same since my initial 'Buy' rated piece back in 2021, making for a ~12% annualized return in just under three years. Data by YCharts2023 was an exceptional year for Erste, with the potent combination of higher interest rates and strong credit quality ultimately driving the bank to a high-teens return on tangible equity (\"RoTE\"). While a near-impossible task to repeat this year, earnings should remain relatively high absent a major economic downturn. With the shares also offering solid capital return potential and a benign current valuation of around 1x tangible book value, Erste remains attractive overall, and I keep my Buy rating in place. Buy Case Recap To recap, Erste generates the majority of its income through retail and business banking. It does technically have universal banking capabilities, but many of its other business lines are fairly niche given its operating footprint (e.g. capital markets services for Central and Eastern European corporates). Net interest income (\"NII\") accounted for around 70% of total operating income last year, with Erste's loan book skewing around 40% toward private households (mostly residential mortgages). Geographically, Austria accounted for around half of the €10.5 billion Erste generated in operating income last year. The remainder was spread out over various other CEE markets, the largest being the Czech Republic (~18%), Romania (~9%), Slovakia (~7%) and Hungary (~7%). One of the standout features of Erste is its funding profile. Erste sports a mid/high-20s share of retail deposits in Austria (~24%), the Czech Republic (~25%) and Slovakia (~27%), and double-digit shares in other CEE markets like Romania (~12%), Hungary (~10%) and Croatia (~15%). Retail deposits fund over 45% of the bank's assets, and over half of these (~55% at the end of 2023) are in current accounts, the cheapest form of bank funding. In a low interest rate environment, cost advantages stemming from deposits tend to be obscured (because even relatively more expensive funding sources will be cheap when interest rates are low). However, it will lead to enhanced profitability in the kind of positive interest rate environment that has characterized the past couple of years. Despite this happening, Erste's valuation remained relatively depressed, essentially offering investors an attractive double-digit internal rate of return with a margin of safety should earnings normalize lower. This drove my 'Buy' rating at prior coverage. Profitability Could Prove Resilient Erste significantly exceeded my expectations last year. At previous coverage, I expected the bank to generate a ~14.5% RoTE, with that representing the upper-end of management's then-guidance of 13-15%. This was principally based on around €7 billion of NII and roughly 25bps in annual credit impairment charges. As it happened, Erste generated a RoTE of 17.2% last year. The main operating profit drivers (i.e. NII, fee & commission income, and operating expenses) all landed pretty close to estimates, but credit expenses were materially lower at just 6bps of customer loans. Data Source: Erste Group Annual ReportsRepeating that is obviously going to be a difficult task, for the very simple reason that credit costs can't stay this low forever. In addition, Erste is potentially looking at interest rate cuts this year along with the rest of the banking industry. This would be a headwind to NII. On the flip side, rate cuts should spur demand for credit. This was a headwind for the bank last year, with loan growth clocking in at under 3% in 2023. Management expects loan growth of 5% this year fueled partly by rate cuts, but for NII to fall 3%. Now, while expectations regarding the extent of rate cuts in the US have moderated sharply recently, this is slightly less the case with the ECB given helpful inflation data in Europe. Indeed, Erste's projections are based on around 100bps of Eurozone cuts this year, with the market currently pricing in around 75-80bps based on the forward curve. As such, I expect NII to land fairly close to guidance this year, possibly a little bit better. Asset quality could prove a slightly more fruitful source of upside. 2024 guidance sees impairment charges at around 25bps of loans this year, ultimately leading to a RoTE of 15%. Source: Erste Group 2023 Annual Results PresentationNow, recent years have seen Erste deliver meaningfully better cost of risk (\"CoR\") than initially guided at the start of the period. For example, management initially expected up to 35bps of impairment charges in 2023, which it then walked down to ~25bps, followed by ~10bps and then finally reporting ~6bps. The bank also outperformed initial guidance on this measure in both 2022 and 2021. I wouldn't strictly say that management has been sandbagging because in fairness this period has encompassed a lot of macro uncertainty in Europe (firstly from COVID, then the war in Ukraine and the accompanying spike in inflation). Still, it is worth keeping in mind. Furthermore, guidance is technically for 'less than' 25bps this year, giving management some flexibility and a 'get out' in that sense. Data Source: Erste Group Annual ReportsCredit quality remains very resilient. While non-performing loans rose around 30bps sequentially in Q4 relative to total loans, the 2.3% NPL ratio remains at historically low levels. Outside of COVID-hit 2020 (when CoR hit 78bps), the last time Erste reported a CoR greater than 25bps was back in 2015. There is some upside to be had here, and as such I think the bank will clear its 15% RoTE target this year. While obviously down a touch on 2023, this would nonetheless be a very resilient performance at this point in the credit cycle, with Erste only delivering a 15%-plus RoTE twice in the past ten years (2018 and 2023). Shares Remain Reasonably Valued Erste trades for $22.76 per ADS at the time of writing (€42.41 per ordinary share in Vienna trading), putting the stock at roughly 1x year-end 2023 tangible book value per share (\"TBVPS\"). Erste has gained around 40% in share price appreciation since last coverage, with that mainly driven by multiple re-rating as opposed to TBVPS per share growth, albeit that has also been strong, growing around 15% last year. On a 15% 2024 RoTE, Erste still offers investors a mid-teens internal rate of return at its current multiple of TBVPS. The bank targets a dividend payout ratio of 40-50%, which at the low-end would result in a yield of around 6% in respect of 2024 (assuming earnings land as expected). A €500 million buyback program will lower shares outstanding by around 2.5% at current prices, so there is a chance that the 2024 DPS will get close to the 2023 payout (€2.70 per share) despite lower profitably. Including the €500 million buyback, this amounts to a shareholder yield of around 9%. Now, Erste is currently sitting on significant levels of surplus capital, with its CET1 capital ratio ending 2023 around 170bps above management's 14% target. Because the bank's total payout (i.e. including buybacks) is still only around 60% of net income, I think there is significant scope for it to return even more capital to shareholders. The bank is currently waiting for a new CEO to start; not wanting to tie his hands too much is probably why management is holding back a little in this regard. Data Source: Erste Group 2023 Annual Results PresentationAided by buybacks, I expect another year of double-digit TBVPS growth this year given the implied high level of retained earnings. On a flat 1x multiple, plus €2.70 per share from the 2023 dividend, gets me to a 12-month total return price of around ~€51 per share (~$27.30 per ADS). With that implying a roughly 20% total return from the current quote, these shares still look attractive notwithstanding their strong recent performance. As such, I keep my 'Buy' rating in place.  Editor's Note: This article discusses one or more securities that do not trade on a major U.S. exchange. 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