Erste Group Bank AG (EBS) Earnings Call Transcript & Summary

[Foreign Language]

[Interpreted] Prepare the infrastructure for the future development of our economy because I believe that different types of economies need different types of energy infrastructure, data centers, et cetera, in order to be able to take the next step in its economic development. And I think that for Europe, this is extremely significant because a lot of the production in recent years was outsourced or went elsewhere, was relocated for various reasons. So there are various reasons for that. We don't need to go into this. But anyway, there's been a relocation, and we need to adapt. We need to open up new business segments where we have more know-how. And I think we still have a big benefit because I believe that the education and training here in Europe is still excellent, and it's available to many people. So we are optimistic, especially optimistic for our own region. Now I'd like to hand over to Stefan, who will focus on the other economic boundary conditions.

[Interpreted] thank you very much, Peter. A cordial welcome to you, ladies and gentlemen, here in the room and also online. Before continuing with the results, I'd like to come back to what Peter just said, namely the geopolitical situation around us, the technological transformation, transformation in general is something that you also described in your commentaries, and this requires financing instruments. And we need the environment that allows us to create the environment which allows us to take part in the race for transformation. We have a very easy -- a very simple slide that reflects reality. Let me start with the dark bar. This is financing investments. We are often talking about equity financing and loan financing if you compare Europe and the U.S.A. The reality is that companies do investments and finance investments internally. And the second part of this slide that you should remember is the high share of loans financed by banks. And allow me to explain how Erste Group developed in this respect and also is positioned in this respect. For many years, I think Peter, 15 years, we prioritize customer financing in our activities also in the capital market. And we also think that this is important also for the economies in the regions where we are doing business. Just let me give you a few figures. In the first half years, we advised on more than 193 capital markets transaction. And this is a very high figure because we could only dream of these figures years ago. And these transactions had a total volume of EUR 146 billion. And it's okay to earn money with that. But we think it is important that capital market financing is on a broad basis as far as hybrid capital is concerned, equity financing and loan financing and that we have to create a broader range for that on a broader basis. And we -- if can contribute to that. This is extremely important. And I think we are on the right track because we, at the moment, have the geographical footprint that allows us to act differently from some years ago. As part of the Advisory Board of the Vienna Stock Exchange, allow me to comment that the Vienna Stock Exchange also developed positively, thanks to owing to the development of Erste Group and other financial groups. And I am convinced that the capital market of Austria will gain importance and has already gained some but we have completely different dimensions, for example, in Poland. Also as far as IPOs are concerned, Poland is the most active market in terms of IPOs, and this is why it is important for us to benefit from the experiences of our Polish colleagues and share these experiences with other countries, with our customers and with our employees outside Poland. Mr. [indiscernible] has joined us in February, was a successful member of the Board of Santander Polska. Its Juan [indiscernible]. I talked to him and also benefited from his experiences from his visits in Central and Eastern Europe. He is enthused about the opportunities that he sees in terms of growth, and we are confident that we will grow in the next months and years. Let me continue with the results, which are closely linked to what I just said. As you know, our central positioning in this region is very much marked by growth. We are on a growth path. We already confirmed that 2 years ago, we want to grow in loans, in loan volumes as well as all other parts of our business. I think it is justified to say that we're on a good track. The loan volume in the first half of the year rose by 21%. Of course, this is not organic growth. This is massively influenced by the consolidation of Erste Bank Polska with EUR 41.4 billion loan portfolio. And this is what I said before. It puts us into a completely different situation. It opens up a new dimension. In all countries, we are doing business and with just one exception, namely Romania, we talk about strong loan growth expressed in euros, we have an increase -- we expect an increase for 2026 that exceeds our positive expectations that we had before Polska was consolidated. For 2026, we expect something that we didn't dream of in the years before. What you see here, higher than 100% in Poland is, of course, self-evident, but 19.2% if you exclude the currency effects in Hungary is remarkable. Of course, this might be due to the political situation. In the past quarter, that is to say, before the election, we saw that Hungary showed a very positive momentum. And we hope in the interest of the Hungarian economy that this will be sustainable -- this is -- this will be seen in the coming years and months. And of course, the counterpart of loans is deposits. And here, as the Erste Group traditionally has a very strong position, the loan-to-deposit ratio of the Group is where we like it to be, that is to be a little bit lower than 90%. This is a very healthy rate. Of course, this is different in the individual countries, but this allows us based upon our strong deposits to continue with our Loan business in an excellent quality, and Alexandra will tell us more about that in a minute. What might be interesting for you is what about the operating result in 2026. Here you see a graph, which will, on the one hand, show the enormous contribution of Erste Bank Polska with more than PLN 1 billion operating result. This, of course, includes the Erste Bank Polska. As such, 100%, we have 49% as a controlling stake. But of course, if you consolidated, you show the result of 100%. So half of it belongs to Erste Bank, the other half belongs to other shareholders. But what we want to show here is the excellent development in the operating result in other countries, which is driven by net interest income and also by net fee and commission income as well as our cost structure, which we improved by technological progress. And Peter already talked about AI, and this will support us further in the future. As far as the development of the operating results in our countries is concerned, we are very satisfied. And on top, we have the dynamism that is taking place in Poland. So consequently, we have a very strong capitalization. For those of you who did not attend the annual conference of 2025, of course, we have the first time consolidation of Erste Bank Polska. And we had a CET1 ratio of 19.2%, which went down to 14.5% owing to the transaction in Poland, but we built up the CET1 ratio to 15.2% in the meantime. And this already includes a deduction of 50% dividend payment. This is important for you to know because for regulatory reasons, we have to make sure that we have the amount of money available for profit distribution, which will be approved in the Annual General Meeting for 2026 -- in 2025. So we have a very strong capitalization even after consolidation of Erste Bank Polska. We are very happy about that. And our target is our loan volume. And we have corporate customers as well as private customers and financial institutions. And due to the good development of the volume, we increased our loan volume target, and we expect that we will have EUR 290 billion in terms of loan volume, maybe a little bit more. And we'll see how the rest of the year develops so much for that. And I'd like to hand over to Alexandra and allow me to say that this is healthy, healthy growth. Of course, you can produce volumes, but what is important is the quality of our loan book. Alexandra, please.

Thank you very much. Stefan already said that we are extremely satisfied with the operating results, and we are also very proud as far as our risk profile and the risk costs are concerned. The risk costs are according to our expectations. And in an environment that is characterized by volatility, geopolitical trends. So we have 20 basis points for the group as such. This includes Erste Bank Polska. And allow me to state, although this is still theoretical, these 20 basis points excludes the effect of first-time consolidation of EUR 300 million because this was a one-off effect in the first quarter, which will not be repeated. So the picture in the individual countries is differentiated. Let me start with the countries that have a very good performance and continue to have a very good performance. This relates to Hungary. This is also due to risk costs. It's the only bank in our region with a net resolution of NPLs. And we have regions where we have a slight addition, the Czech Republic and Croatia. Poland also has a very good risk profile. I already told you earlier that risk costs in Poland are slightly higher than in the rest of the region. And this is -- this applies not only to our bank, but for the whole market. We published the results today, and the expectations are very optimistic as the future is concerned. And the first half year was better than expected. Romania, Peter already talked about that, has a negative economic growth. Of course, this has an effect on risk costs, in particular, as regards to the FLI model where macroeconomic factors are included. And in June, we had an addition in Romanian, a slight dissolution in Austria. Coming back to Austria, here, we see an improvement. You all know that the previous quarters in Austria were difficult ones, in particular, as regards commercial real estate, in particular, in Vienna as around Vienna. And we see a flattening of the negative curve. We see the number of NPLs rising not as they did in the past. And though it's also a slight recovery, I -- we are still cautious, but I can say today that we are cautiously optimistic as far as the further development and further performance in Austria is concerned. h Here, you see the NPL ratio. Excellent, which isn't only good, it's excellent. An NPL ratio at a level of 2.3% is extraordinary. I talked about Romania before. The situation is more difficult in Romania, but also in Romania, the NPL ratio is below 3% owing to portfolio analysis and portfolio sales. So it's a very -- it's an excellent figure, and we are confident that 2.3% or maybe 2.4% can be achieved by the end of the year. Growth has been mentioned several times today. And I'm as proud as everyone else that we could increase our loan volume to EUR 290 billion. And if you have the time and want to go back and see what we have in the past, you see that we grew organically, and this is remarkable. And we also managed to retain a consistent risk profile, and this is the result of consistent work of many colleagues. But it is also the result of what you see here. A major part of risk management is diversification of the portfolio. So if you invest privately, you are still diversified. And this, of course, also relates to the bank. And here, we also see the households that are diversified in itself. Households remain the biggest category and slightly grew with the integration of Erste Bank Polska and the industries where we have the largest concentration. And if you take the 5 major industries, so concentration is now 2.5%. And if you look at real estate in Austria, which has a low risk but has high volume on the other hand. This concentration went down to 15.9% by more than 2 percentage points because the Polish bank and also other banks outside Austria do not have a super proportional business in real estate. This doesn't mean that we don't like to do real estate business. It's also always a question of balance. Here, you see that all other industries grew slightly. So we have a higher diversification. We haven't only become bigger, but also have a broader range of diversification, which will help us to have a healthy growth rate in the past -- in the future as we had in the past. Stefan please. No Peter, its your turn.

I would like to comment on the extremely positive risk situation. It is not only the diversification has increased due to the acquisition in Poland. But for several years now, we have seen an extremely stable risk situation also in Central and Eastern Europe. And this is due to the fact that we have the best risk team in the region. We have a lot of experience in those countries. We know our customers there. We know their risk appetite. And our risk team has really done an excellent job. And of course, we have to say that -- all the corporate customers in the region have also done an excellent job in the past few years because the years after COVID were anything but easy. I think this was a steep learning curve, especially as far as liquidity control is concerned. And this was a wake-up call in terms of increasing the resiliency of supply chains. I think it is fair to say that the corporate landscape in our region is much more robust and much better positioned than it was before COVID because people really went to great lengths in order to be better positioned. Now what is the way forward in terms of Erste Bank Polska? We only had one weekend as we agreed with our Spanish colleague to do the rebranding. When I heard about this during negotiations, I thought, well, this is quite ambitious. So we have a large number of branch offices. It's not only about the branch offices, it's also about a lot of other assets that need to be rebranded and need to be considered for marketing. And of course, we want to create a positive impetus, also emotionally because this large customer stock that we have in Poland should not only be maintained, but also made happy. So it is our goal to make our customers happy. And of course, you need -- whenever there's any potential conversions on the IT side, you need to be very careful to make sure that it all is successful. And I'm very pleased to say that we did an excellent job. Both teams, the local and the central team did wonderful jobs. And you can imagine that this required a lot of preparation in order to be able to do this in just 2 days to change everything around and to do the rebranding with a positive outlook and a good mood. So before I start praising ourselves, let's listen to the video. [Presentation]

As you all know, traditionally, we don't have any media investments. So that's the Polish BBC equivalent. They're really independent. So very pleased that we're getting such excellent feedback. If you take a look at the figures, we would never have expected that after 2.5 months, we already have 68% unaided brand awareness and 78% for aided brand awareness. So the recommendation as an employer has improved. So the churn rate has come down. So it is very important that the employees are also satisfied with the new ownership and the overall satisfaction has increased by 2%, and we have more than 300,000 new customers year-to-date. So the rebranding, of course, is never finished to build up a brand takes many years. It's a long drawn-out process, and we are not only ready to invest, but we also have experience in terms of how to transform a brand to make it more attractive. Now in terms of the IT transformation, we also have two very strong teams, local and the centralized team. They will continue to work on that for another 2 years. So our systems, our applications that were made available by Spain in the past will be either -- well provided locally or provided by the group. So that requires a lot of work, but this isn't something that we aren't really used to or that we can't manage ourselves. So the brand visibility needs to be enhanced further. The Polish market is by far our biggest market, also in terms of the number of inhabitants with 38 million. It is a huge market. So it's a big economy as well. And in the corporate business, but also in the retail and asset management business, we see a huge potential going forward in the coming 20 to 30 years. Now let me summarize, and then we'll be available for your questions. So the way we look at Central Europe is it is the growth engine in Europe and this catch-up phase is, of course, always moving, but this has turned into a dynamic of its own and the entire region is now being put in a completely different development situation. Of course, it is important to use a well-considered approach to invest in the new business infrastructure. The reason this is important is that the flow of money from the European Union will not be there forever. So you know that a lot of funds in Europe are increasingly under pressure in many countries, there's a need to invest more in defense. This is especially important for NATO countries. So the net contributors are -- their budgets are put under pressure. So I'm also looking forward to the new round of budget negotiations for the next EU budget starting in 2028. So it is to be expected there will be less funding available, and it is important to make the right investments now in order to be able to have everything it takes to continue to grow. I think it's also very interesting for Austria because due to our geographic location, we can either decide to participate in the dynamic of Central Europe or opt for the standstill of Western Europe. I think it is up to us to decide for either. And I think there are many reasons why we should join this dynamic, this momentum in Eastern Europe and our loan volume of EUR 290 billion would have been absurd, a couple of years ago. And now it is quite realistic to reach this goal. So I'd like to thank you for your attention. We're looking forward to your questions.

[Operator Instructions] So we'll start with Ms. [indiscernible] from [indiscernible] Press Agency.

I have a question on the customer structure in Poland. You said that real estate is not a big business there, but what about the differentiation between corporate customers, retail customers, which industries? And the second question is on bank taxes. The spending has increased in terms of bank taxes. So what's the situation going forward? Your long-term forecast until 2030 assumes that the spending will not increase. Are you hoping that there will be changes in Hungary due to the regime change there or maybe other countries?

Well, of course, there's always hope. And in Austria, we are in a situation where we thought that the banking levy will be limited in time. Now it's been extended again. And let me share another interesting figure with you. The total taxes that we paid at the group level, also in terms of corporate taxes, we paid EUR 1 billion worth in taxes. So that's a significant amount. Do we think that this is continuing to go up? No, we don't think so. I believe that on the whole, all stakeholders understand that we need to continue to develop the economy that can't be done by just taxing profits because that will prevent companies from investing. So I think everybody will be aware that this is not the way forward. We've also seen in Austria that tax increases don't really help grow the economy. So we do believe that people can add up one and one.

Well, extremely balanced in terms of the corporate customers, retail customers and also the industries. What's interesting about Poland as such is that when compared to other countries, it is much more diversified. In Hungary, for example, a lot of the business is concentrated in Budapest. In Poland, it's distributed over many cities and regions. It's not only Warsaw, there's also other significant economic centers in Poland and also the share in the various industries. I'm talking about all of Poland, not just our bank. So this is very well balanced. There's a good equilibrium. There's no disproportionate concentration here or there. And this is how our portfolio is structured in Poland. It reflects this very diversified economy in Poland. So its -- very balanced whether we're talking about the volume or the profitability, well, I don't know.

[Operator Instructions] The next question comes from Martin Nieder from Bloomberg.

In the analyst call, you also talked about the fact that you are preparing for increasing your share in Poland. So no decision has been taken yet, but you're preparing for it. So I'd like to ask, is Poland your top priority when it comes to further acquisitions? Or is there a possibility that other options may be more interesting? So maybe in Hungary, there will be an opportunity where you have a low market share.

I think logic dictates that we should increase our share in Poland because we have 49% of something that we consider to be an excellent investment. We also combined investments with integration, and we'd like to scale this up. So I think this is quite that we want to grow there. But we have not taken a decision yet. I think everybody knows that we're interested in increasing our share there. But of course, we need to see when it makes sense, when it's just right. As far as Hungary is concerned, well, I would not expect anything to go down in Hungary this year. I think it's a matter of our ownership structure. So if you're thinking about the bank that I have in mind, which is a conglomerate of 3 existing banks, I think it is way too soon to see how this will play out.

But you're interested?

I think we already said that we're interested in growing in Hungary. We demonstrated this in the past. The portfolio of the [ Commerz ] bank, well, it's not so long ago that we took it over. And then before that, we took over the portfolio of Citibank. And of course, we believe that Hungary is a very interesting market. You should not underestimate the fact that as far as the entrepreneurial spirit is concerned, this is one of the most interesting countries. Hungary has a long-standing tradition of start-ups going back in history for a long time. And I believe that in the past 12 months, Hungary has really evolved and developed very well because for a long time, the country was in the deleveraging process. So they reduced loans. And now their situation has turned around. I believe that there is a positive outlook. because people only invest when they have a positive outlook going forward. So we have a very strong team in Hungary. And of course, we are ready to support the country in its economic development. I think the situation is far from being easy because they still have a very high budget deficit and I believe that the readiness to reduce existing funding is well, limited. But I think that in August, there will be a budget review for this year's budget in September and October, new budgets can be expected. And we're, of course, looking forward to seeing where people are going to invest. And we are going to orient our strategy in Hungary accordingly, and we'll continue to support the country.

Next question from Mr [indiscernible] from [indiscernible]. You talked about joining the.

You talked about joining the momentum of CEE. And you also said that Poland is the country with the highest number of IPOs. So what can we benefit from that? We are a country with a much lower number of IPOs. What can we learn from the dynamism in Poland?

I think it's also the willingness of entrepreneurs to make an IPO and this can be promoted the Vienna Stock Exchange does a good job. But we also need companies that want to be listed at the stock exchange. And we all know here that this requires a lot of work in order to create reporting, which is important for shareholders. You need investments in your accounting team, so it doesn't happen overnight without any effort. The public sector could support such a development. And allow me to say that I read an interview of the telecom regulator, which was very interesting. And this regulator said that the digital infrastructure in Austria is not owned by Austria because telcos are owned by Germans, by Asian companies or by Mexican companies. I think 61% investment of Mexicans in Austria, maybe they are interested in selling off their investments. 60% of telecom Austria cost EUR 4.3, 4.4 billion plus a premium. [indiscernible] pays a dividend of EUR 1.2 billion, and I'd say, okay, Mr. [indiscernible] already reserved these means because he has -- he relies on this income. But why don't you why don't -- you sell 15% of [indiscernible] via the stock exchange in order to buy telecom shares? And [indiscernible] after that would be controlled by the Republic of Austria. And if we compare our pension systems, we are always looking with a certain degree of [indiscernible] to Scandinavia. Scandinavia has second pillars, much more second pillars than, for example, other countries such as Austria. If you're talking about Norway, of course, they have oil reserves and the state has a lot of income from oil. And this is, of course, one of the prerequisites for establishing a pension structure. So we don't have oil. We don't have natural reserves that can bring us money. But I think about this as a group of professional companies, which are very important for Austria and also for Central Europe. So OMV, for example, has done sensational things also as far as their business enlargement is concerned. So it would be interesting to invest in a portfolio of companies such as [indiscernible] has than in individual companies.

Allow me to add that it must make sense for companies to go public. And people think about various opportunities to further develop their business. And if the best way is going public... And it is not done, this might be due to the frame conditions. And you might know from various discussions that the Austrian state does not promote IPOs. But I'm optimistic that something could happen in the next 2 to 3 years. So we are not talking about the capital market union, but Europe on a national basis, here, things can change. And Poland is a country that can do something at local level, but not everything seen from an international point of view. And secondly, I'd like to turn your attention to technology. I don't want to talk about AI, but maybe approach as far as reporting is concerned and settlement can be simplified and optimized so that there is no obstacle anymore for smaller and medium-sized companies to go public. And last but not least, we shouldn't forget that there is something that is often underestimated. It's always about the long-term view if you go public. Those wanting to make quick profits will not invest in an IPO, but for the capital market as such. So if you take Erste Group as an example, and you also mentioned OMV, this is a perfect example. This is something -- that's clear. These are companies that create values over years, over decades. And I think this must be emphasized when talking about IPOs. And I think this is more important than the second or third pillar in the pension system. We think that without a capital market, nothing goes in the medium term. I [indiscernible] hope that last, but I'm convinced that given the current environment and also the pressure that is exerted on Europe, maybe we see one or more positive reactions. We are fully taking part in this business, and we want to do everything to help.

And what Stefan showed in one of the slides also illustrates that we want to diversify our loan portfolio. Of course, we are happy about the loan volume of more than EUR 290 billion, but it is also clear that we also promote bond issuance and also equity. If you look at the economic development of the past 20 years, Europe always concentrated on industry and and trade. And this is something banks are experiencing. But many things happened in technology and software and the European banking system with the means available to us can only help partially because lending is based upon collaterals. And if you have IT, you don't have any collateral. And this is why it is no surprise that many IT applications were developed in the U.S. because there is a completely different equity structure in the U.S. Of course, Europe was able to catch up. So equity is a scarce means, of course, and there are other sources, [ SpeedInvest ], for example, which are very successful, but there are also venture funds available that are willing to invest in such start-ups. So many developments took place that make me optimistic, and we will continue our path in Europe as a group. And as I said before, economic development in our group was characterized by innovation. It is Eastern Europe and Central and Eastern Europe is no longer the manufacturing entity of Europe.

Let me read a question by Mr. Alexander [indiscernible] from [indiscernible] a question asked online. Is there any effect of the Ukrainian war on the business of Erste Group in the region? Erste Group is part of a consortium of banks, which was responsible for a guarantee of [indiscernible] AG and new investments there. And what is the investment of Erste Group in [indiscernible]?

Let me start with the second question, and I'll be brief. We don't comment on individual transactions or comment on names. But Erste Group doesn't have any great experience with industrial holdings. That's the way it is. And of course, the war influences our business in many ways. Peter already talked about that. And of course, it is a challenge for our customers, which showed a steep learning curve after the corona crisis, after the pandemic, they are more resilient, are aware of the supply chains. Of course, investment appetite is lower in the regions that are hit by the war. Let me turn the coin and look at the other side of the coin. But before that, a theoretical comment. Of course, we talked about Romania and the war has influences the macroeconomic environment in Romania and also has an influence on the risk cost in the FLI model, but only in a moderate way. And in conclusion, let me see it the other way around. The end of the war would have positive impact on economic growth in our countries and due to the geographical vicinity to Ukraine, we think that the companies in the region can make a great distribution to the reconstruction of the country. Ms [indiscernible] from Wall Street Journal Romania.