June 24, 2013 5:21 pm

Erste shares fall on profit warning

Shares in Erste Group fell sharply after Austria’s biggest bank issued a profit warning and said that it would seek to raise about €660m in capital to pay back the emergency funding it received during the financial crisis.

Market conditions permitting, the new shares are due to be issued in the third quarter and will allow Erste to repay in full the €1.76bn in non-voting participation capital it issued in order to calm investors during the market turmoil of 2009.

About one-third of the participation capital is held by private investors, and the remaining two-thirds are held by the Austrian state. Maria Fekter, Austria’s finance minister, said that the move was “very good news”.

“This happy news proves to me . . . that we have dealt with the crisis better than many others,” she said.

However, investors were less enthused by the capital raising – equivalent to about 8 per cent of Erste’s market capitalisation – and the bank’s accompanying warning that it expects its operating income to fall as much as 5 per cent this year in comparison with 2012.

Erste said the reason for its decision to repay the participation stake now was a result of impending coupon increases and the phasing in of the tough new Basel III capital rules.

“The cost of the participation capital will increase annually from 2014, while the eligibility of participation capital as a common equity instrument under new regulatory requirements is decreasing over time,” the bank said in a statement.

Erste expects the procedure to save it €149m in 2014 and €158m in 2015 on a post tax basis, as it will no longer have to pay dividends on the participation capital.

“The planned redemption of participation capital will further strengthen Erste Group’s ability to generate capital and improve capital ratios,” the company said, adding that it expected its core tier one capital ratio to reach its target of 10 per cent by the end of 2014.

Analysts said Erste’s move was likely to raise the pressure on Raiffeisen Bank International, its main domestic rival, to follow suit.

Raiffeisen took €2.5bn in participation capital – €1.75bn of which came from the Austrian state – in 2009 and has long said that it would consider a capital increase if market conditions were appropriate.

Raiffeisen’s new chief executive, Karl Sevelda, reiterated this stance two weeks ago when he assumed office following the abrupt departure of his predecessor Herbert Stepic.

Stefan Nedialkov, an analyst at Citi, said Raiffeisen would need to raise €1.5bn to enable it to repay its participation capital by the end of this year.

Shares in Erste were down €1.64 at €20.31 in mid-afternoon trading in Vienna.

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