Austrian lender Erste Bank — heavily invested in the emerging European banking systems of countries like Romania and the Czech Republic – said late Thursday it was launching a €1.6bn no-discount rights issue to bring its capital base in line with raised expectations on mounting loan losses in emerging Europe.
The move was apparently aimed at avoiding another government injection, this time via a hybrid capital issue. The curious thing though is that the issue, intended to boost Erste’s core tier-1 capital to 7.8 per cent (just below the 8 per cent level that has become the new informal standard in Europe), is set to come to market without a discount.
This, of course, is quite the opposite of what other rights-issuing banks like Swedbank and Socgen have been doing — their discounts being as steep as 40 per cent.
As the statement reads:
- Erste Group Bank AG will launch a capital increase of up to 60 million new shares on November 2, 2009 in order to further increase its capital ratios and improve its capital structure. If all of the new shares are issued, the gross proceeds of the offering will be EUR 1.65 billion, based on an assumed offer price of EUR 27.50 (today’s closing price of Erste Group Bank’s shares on the Vienna Stock Exchange).
- If all of the shares are taken up at the assumed offer price, the Bank’s total equity (including minority interests and participation capital) will increase from the current EUR 14.1 billion to EUR 15.7 billion. On a pro-forma basis, this would increase Erste Group Bank’s core tier-1 ratio from the current 6.5% to 7.8% and increase its tier-1 ratio1 from the current 7.4% to 8.8%.
- Erste Group Bank intends to use the net proceeds of the offering to increase its core tier-1 capital. Erste Group has no current plans to repay the participation capital, which was issued to the Republic of Austria (EUR 1.2 billion) and to private investors (EUR 0.5 billion) in March/May 2009. The participation capital qualifies as core tier-1 capital and pays an 8% non-cumulative dividend. – With the offering, Erste Group intends to substitute the previously planned issuance of government-sponsored hybrid capital with common equity.
- The capital increase will be an ‘at market’ rights issue with subscription rights for existing shareholders in the ratio of 3 new shares for each 16 shares held. The maximum offer price will be EUR 32. The final offer price for the new shares will be determined after the end of the offering period.
- The offering and subscription periods are scheduled to begin on November 2, 2009, subject to approval of the prospectus by the FMA, which is expected October 30, 2009. The subscription period for holders of subscription rights will end on November 16, 2009, and the offering of shares not subscribed for by holders of subscription rights will end on November 17, 2009.
Spain’s Criteria Caixa will act as underwriter by promising to buy all the subscription rights of Erste’s main shareholder, the Erste Foundation charity.
Whether this is the last of Erste’s troubles — and for that matter emerging Europe’s — is yet to be seen though. The bank’s CEO, Andreas Treichl, was cautiously vague in the company’s third quarter statement published on Friday. He suggested that while there were some encouraging signs in the slowing rate of non-performing loans, he added the crisis was not necessarily over yet. He also failed to give a forecast for this or next year’s earnings.
The bank beat Q3 earnings forecasts with net profit of €228m in the three months to September — down 12 per cent on the quarter but 21 per cent ahead of the average estimate in a Reuters poll of 13 analysts.
Erste Bank shares opened 2.9 per cent higher in Vienna following the news.
Of course, investors might be guided towards Erste’s loan loss provision situation. As FT Alphaville has noted, had Erste provided for a flat coverage ratio on 2008, a €203 PBT would have become a loss of €378m. Erste’s profits would have fallen by 66 per cent. This time round, however, risk provisions do appear to have gone up a solid 140.6 per cent:
Risk provisions (allocation/release of provisions relating to the credit business and costs from directly writing off loans and income from the receipt of loans already written off) increased by 140.6% from EUR 602.3 million to EUR 1,449.2 million. Weaker economic conditions compared to the previous year and the ensuing rise in defaults as well as declining customer creditworthiness were the main reasons for the creation of additional risk provisions. However, the increase in the NPL coverage ratio (based on customer loans) in the third quarter from 55.2% to 56.7% also contributed to the increase. As a percentage of average customer loans, risk provisions amounted to 151 basis points in the first nine months of 2009 (2008: 67 basis points).
To compare, the ratio of non performing loans to loans and advances to customers grew from 4.7 per cent to 6.3 per cent, while the ratio of non-performing loans to total exposure increased from 2.9 per cent to 3.8 per cent over the same period.
Related links:
Banks’ coverage ratio capers, cont. - FT Alphaville