Awards for Excellence 2017
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This year’s best bank award recognizes Erste Group’s achievements in completing the protracted restructuring of its network and positioning itself to take advantage of growth opportunities in the region, while at the same time meeting the challenges of technology.
The Austrian group’s problems in the wake of the financial crisis have been well-aired. BCR, the Romanian market leader bought by Erste in 2005, suffered substantial losses as large portfolios of corporate debt turned sour. Bank taxes and the forced conversion of foreign-currency loan portfolios took a heavy toll in Hungary, while a modest venture into Ukraine rapidly became a liability.
Addressing these issues was no easy task, particularly against a backdrop of falling interest rates and weak credit demand. Erste’s response, however, was disciplined, proactive and effective. Under the leadership of long-standing CEO Andreas Treichl, the group refocused on its traditional retail banking model.
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Andreas Treichl, Erste Group |
“We decided to concentrate on our strengths rather than trying to be everything to everybody,” says Treichl, who has led the group since 1997. “We have historically positioned ourselves as the bank of the middle class and the SMEs in the eastern part of the EU, so we shifted away from everything that didn’t serve that purpose.”
Ukraine was quickly jettisoned, while in its core central and eastern European countries, Erste set about improving efficiency, restructuring bad debts and building local funding bases. This proved easier in some markets than in others. The Czech Republic and Slovakia remained reliable profit-generators throughout the post-crisis period despite ultra-low interest rates.
In Hungary, however, stringent cost-cutting was insufficient to compensate for the charges imposed on the banking sector by prime minister Viktor Orban’s administration. Treichl therefore took the bold step of negotiating directly with Orban, securing a landmark three-way deal with the EBRD that saw the government pledge to slash bank levies and take a 15% stake in Erste Hungary.
Meanwhile, a radical overhaul of BCR slashed the bank’s headcount by more than a quarter and several billion euros’ worth of impaired assets provisioned, worked out and sold. Non-performing loan management also weakened returns from Erste’s operations in Croatia and Serbia.
For the group’s shareholders, the restructuring process was unprecedentedly painful. In 2011, Erste recorded its first loss since going public in 1997. Three years later it had returned to the red again to the tune of €1.4 billion on the back of hefty increases in provisioning and goodwill write-downs on its CEE subsidiaries.
Two years later, however, the benefits of Erste’s strategy are becoming increasingly apparent. In 2016, the group’s return on equity reached 11.4%, the highest level since 2007. Last year was also the first since 2010 when all six of its core CEE markets posted a net profit. Impairment costs were down to just €196 million, while capital raising at group level resulted in a fully loaded common equity tier-1 ratio of 12.8%.
Erste’s success was recognized this year by two of the three main ratings agencies. Standard & Poor’s and Fitch both restored the group’s single-A rating in March, citing its balance sheet clean-up, improved earnings and strong internal capital generation.
Fitch also noted the improved operating environment in CEE. The IMF is tipping economic growth in all Erste’s core markets to come in at around 3% this year – with the exception of Romania, where it is expected to top 4%.
Rising inflationary pressures suggest interest rates may finally rise from historic lows, while banking penetration in the region remains extremely weak. Even in Czech Republic, bank lending equates to just 62.7% of GDP. For Romania, the figure is below 30%.
Following its restructuring, Erste is well-positioned to take advantage of these trends. It is also better prepared than most regional rivals to meet the challenge from fintech in CEE’s increasingly tech-oriented markets. The group has invested heavily in technology and is getting ready to roll out a new digital platform across its network. The platform, called George, was developed in conjunction with Erste’s Czech and Slovak operations and launched in Austria in 2015.
According to Treichl, it will be the first cross-country digital platform in CEE and one of the first anywhere in Europe. “It was very clear to us that developing an ecosystem for digital services had to be a group effort,” he says. “It can’t be substantially different from country to country.”
His enthusiasm for digital integration reflects a key tenet of Erste’s strategy, namely the need for timely and coordinated data provision. “A fully compliant, group-wide database will allow rapid retrieval of information for clients, regulators and the bank itself,” says Treichl. “That in turn offers scope for big improvements in efficiency.”
He is equally concerned to ensure the long-term financial health of Erste’s clients. Another pillar of the group’s recent strategy has been a return to traditional customer-centric banking and the rejection of the pre-crisis caveat emptor model.
“Banks have too often taken the view that their clients are grown up, and that if something is legal and profitable then it’s OK to sell it to them,” says Treichl. “But the fact is that in the retail business, financial literacy is limited. Our clients very often don’t understand what is good for them, and our purpose is to educate them, not to sell them something they don’t need.
“We have become very strict on this, and people are starting to recognize that. Our customers believe that we will take care of them.”
Annual deposit growth of more than 10% in many of Erste’s markets suggests that he is right – and provides the basis for rapid growth in lending and profitability as the EU’s eastern markets undergo the long-term process of convergence with the west.
