Erste Group 2Q 2011 results

Net interest income was ahead of forecasts based on improving margins in AT and CZ, but was even weaker than in 1Q in Romania. F&C income fell short of our expectations in AT and CZ (likely due to a weaker securities business). Net trading result again topped our forecast due to a unusually high result in Group Corporate and Investment banking (likely a hedging gain). Risk costs were still higher than expected (+4% qoq) especially in Group Corporates as well as in RO and HU segments. NPL ratio was still up from 7.7% in 1Q to 7.9% (higher NPL formation vs. 4Q and 1Q) in 2Q mainly driven by these 2 countries and the NPL coverage dropped from 61.4% to 60.6%.

Customer loans increased by 0.9% qoq mainly driven by currency movements and growing volumes in AT and SK. Deposits were up 1.4% qoq based on inflows especially in AT and HU. Loan/deposits therefore further improved to 111%. Equity trend was even slightly better than expected. Core tier 1 excl. hybrid but incl. participation capital improved from 9.4% to 9.5% despite a 0.4% hit by the dividend as Afs valuation impact was better than expected. Management confirmed its soft guidance: resilient net interest margins, accelerating loan growth, operating costs to grow below inflation rate, risk costs to decline from 1H level but remain elevated in RO and HU. In addition management confirmed its intention to repay state participation capital following regulatory approval. We stick to our 'hold' recommendation and expect negative reaction on figures today.