Erste Group Bank AG expects a decline in cost of risk and improvement in profitability in 2021, given the positive economic outlook for its markets of operation in central and Eastern Europe, CEO Bernd Spalt said at a 2020 earnings presentation Feb. 26.

For 2020, the Austrian bank posted a drop in net profit attributable to owners of the parent to €783.1 million from €1.47 billion a year ago, while its cost of risk soared to nearly €1.3 billion from €39.2 million in 2019.

The projected positive GDP growth across the bank’s markets, which include Austria, Czechia, Slovakia, Hungary, Romania, Serbia and Croatia, will result in loan growth in the low to middle single-digit percentage range across those markets, Spalt told analysts.

Net interest income will remain “flattish” as compared to 2019, while the fair value and trading result should improve year over year, the CEO said. Erste also expects a low to middle single-digit percentage rise in fee income rates, Spalt said.

The bank will strive to achieve a positive jaw ratio, which measures income growth to cost growth, in 2021 but cannot “firmly” commit to this target, the CEO said.

The key challenge here is the strong 2020 operating result of €2.93 billion, which will be hard to beat this year given that costs also need to be under control to keep the cost-to-income ratio within a range that would not endanger the positive jaws, CFO Stefan Dörfler said.

“Honestly speaking, we are setting the ambition and we are optimistic but based on the excellent operating result in 2020, it is not something that we actually translate into a guidance,” he said.

When it comes to risk, the bank has done a lot of frontloading in 2020. Therefore, if the economic recovery in its markets happens as expected, the bank’s cost of risk should decline this year, the CEO said.

Erste guides for cost of risk below 65 basis points of gross customer loans in 2021 and a nonperforming-to-total loans ratio of 3% to 4%. In 2020, cost of risk was 78 basis points and the NPL ratio was 2.7%.

With positive revenue and cost development and a lower cost of risk, “profitability is expected to be better than in 2020,” Spalt said, but cautioned that achieving the bank’s 2021 targets depends heavily on the success of the vaccination strategy across Erste’s markets over the next two to three quarters. This is essential for the economic recovery in the region and a core risk to Erste’s outlook, the CEO said.

S&P Global