Morgan Stanley Annual European Financials Conference March 2015, London Erste Group Transforming business models: digital, regulation and macro challenges Gernot Mittendorfer, CFO Erste Group
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Presentation topics Digital banking Regulatory environment Macroeconomic environment Outlook Additional information 3
The digital banking challenge Competing against start-ups, technology companies and other banks 4
The digital banking challenge Changing customer behaviour 50 45 40 35 30 25 20 15 10 5 Austria: 48% (2014) Czech Republic: 46% Slovakia: 41% Hungary: 30% Croatia: 19% Romania: 4% Euro zone avg: 45% Online banking penetration (%) AT CZ SK RO HU HR 0 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 Very high penetration in Northern European countries (around 80%) compared to Southern Europe (20-30%) Penetration of CEE countries has significantly increased but still much lower than Euro zone average Source: Eurostat; Croatia not available for 2005 and 2006 5
The digital banking challenge Continuous increase of digital clients 36% 58% 58% 53% 50% 33% 40% Erste Group: Proportion of digital clients 55% 56% 50% 25% Erste Group (2010): 2.6mn clients Erste Group (2014): 4.0mn clients 41% 36% 39% 34% 6% 7% 8% 7% 3% 18% 18% 35% 31% 43% 2010 2011 2012 2013 2014 18% 18% 15% 15% 17% AT CZ SK RO HU HR Value in customer data Digitalisation will lead to cost reductions from smaller branch network and lower transaction costs 6
The digital banking challenge George: the foundation for a new digital financial ecosystem Philosophy behind George: making banking personal Rollout of first uniform platform across the group commenced in 2015 in Austria Enabling transformation of business model from branch centric to 360 omnichannel bank model Enabling full customisation of banking experience through free and paid apps (plugins) Permanent improvement/development, ie iterative product development Erste advantage: we already know the customer, we have an existing relationship to the customer Future capabilities of George Becoming virtual bank with full transactional and sales capabilities Staged rollout process across the group 7
Presentation topics Digital banking Regulatory environment Macroeconomic environment Outlook Additional information 8
Regulatory environment ECB expected to harmonise capital ratios Erste Group: Total capital ratio* Erste Group: CET1 ratio* 15.5% 16.3% 15.7% 14.4% 13.5% 12.7% 8.3% 9.2% 9.4% 11.2% 11.4% 10.6% 10.1% 9.8% 5.0% 5.2% 2007 2008 2009 2010 2011 2012 2013 2014 2007 2008 2009 2010 2011 2012 2013 2014 B3FL CET 1-ratio at 10.6% (YE 2014) no gap between B3FL CET 1-ratio and phased-in CET 1-ratio Full recognition of AFS reserve (post haircut) under fully loaded regime *2014: Basel 3 Phased-in; previous years: Basel 2 and 2.5 9
Regulatory environment Erste Group boasts a high risk weighting ratio Erste Group: total risk-weighted assets to total assets 59.6% 61.4% 58.2% 54.3% 49.3% 48.9% 51.2% 2008 2009 2010 2011 2012 2013 2014 Credit RWA in relation to total assets amounted to 44.4% as of Dec 2014 Marginal market risk, amounting to only 1.6% of total assets as of Dec 2014 10
Regulatory environment ECB will influence dividend payments of European banks Erste Group: Dividend per share (EUR) Erste Group: Dividend payout ratio 0.75 0.65 0.65 0.70 141% 0.40 0.20 20% 24% 27% 30% 33% 0.00 0.00 0% 0% 2007 2008 2009 2010 2011 2012 2013 2014 2007 2008 2009 2010 2011 2012 2013 2014 Management proposes no dividend payment to AGM after 2014 results Resumption of dividend payment for FY 2015 expected in 2016 11
Presentation topics Digital banking Regulatory environment Macroeconomic environment Outlook Additional information 12
Macroeconomic environment Historic low interest rate environment poses challenges Consumer price index (avg. in %) Key central bank policy rates (%) 7 6 5 4 3 AT CZ SK RO HU HR 7.00 2 2.25 2.10 1 0 0.05 0.05 0.05-12010 2011 2012 2013 2014 AT CZ SK RO HU HR Falling inflation in 2014 driven mainly by subdued fuel and food prices Interest rates expected to remain low in 2015 Despite low rates most of the CEE currencies were relatively stable in 2014 Source: Erste Group Research 13
Macroeconomic environment CEE economies have continuously outgrown the euro zone Real GDP growth in CEE (%) 3.6 2014 2015e 2014 Euro zone avg: 0.9% (2015e: 1.3%) 2.9 2.0 2.4 2.4 2.5 2.2 2.5 0.9 0.4 0.0-0.4 AT CZ SK RO HU HR Most of the CEE economies expected to maintain their growth of around 2-3% in 2015 Positive 2015 outlook supported by Q4 GDP data: AT (0.0%), CZ (+1.3%), RO (+2.5%), SK (+2.4%), HU (+3.4%) Source: Erste Group Research 14
Macroeconomic environment Improved domestic demand drives economic growth Domestic demand contribution to growth (%) Net export contribution to growth (%) 2014 2014 2015e 2015e 4.0 2.7 2.2 2.4 2.4 2.1 3.0 1.3 1.4 0.7 0.9 1.2 0.0 0.3 0.1 0.5 0.1 0.6-1.8-0.6-0.1-0.2-0.4-0.5 AT CZ SK RO HU HR AT CZ SK RO HU HR Domestic demand has visibly improved across the region and become the main contributor to growth Exports are supported by improving German economy (+1.5% yoy in Q4 2015) Domestic demand contribution includes inventory change. Source: Erste Group Research, EU Autumn Economic Forecast 2014. 15
Presentation topics Digital banking Regulatory environment Macroeconomic environment Outlook Additional information 16
Conclusion Outlook Operating environment anticipated to be conducive to credit expansion Real GDP growth of between 2-3% expected in 2015 in all major CEE markets, except Croatia Real GDP growth to be driven by rising domestic demand Real GDP growth in Austria expected at below 1% in 2015 Return on tangible equity (ROTE) expected at 8-10% in 2015 (YE 14 TE: EUR 8.4bn) Operating result expected to decline in the mid-single digits on the back of lower but sustainable operating results in Hungary (due to FX conversion related effects of lower average volume and expected reversal of positive 2014 trading effect in 2015) and Romania (lower unwinding impact) as well as persistent low interest rate environment Loan growth expected in the low single digits in 2015 Risk costs expected to decline significantly in 2015 Banking levies expected at about EUR 360m in 2015, including contributions to European bank resolution and deposit insurance funds; related discussions with Austrian government still ongoing Risks to guidance Consumer protection initiatives, eg potential pre-election CHF legislation in Croatia Geopolitical risks (Eastern Ukraine conflict, Greece) resulting in potentially negative economic impacts 17
Presentation topics Digital banking Regulatory environment Macroeconomic environment Outlook Additional information 18
Additional information: footprint Customer banking in Austria and the eastern part of the EU Erste Group footprint Czech Republic Customers: 5.0m Employees : 10,504 Branches : 644 Slovakia Customers: 2.4m Employees : 4,275 Branches: 292 Hungary Customers : 0.9m Employees : 2,766 Branches: 128 Romania Customers : 3.0m Employees : 7,054 Branches: 538 Highlights Leading retail and corporate bank in 7 geographically connected countries Favourable mix of mature & emerging markets with low penetration rates Potential for cross selling and organic growth in CEE Direct presence Austria Croatia Serbia Indirect presence Customers: 3.4m Customers : 1.1m Customers : 0.4m Employees: 15,550 Employees : 2,754 Employees : 955 Branches: 964 Branches: 158 Branches: 68 19
Additional information: strategy A real customer need is the reason for all business Customer banking in Central and Eastern Europe Eastern part of EU Focus on CEE, limited exposure to other Europe Retail banking Corporate banking Capital markets Public sector Interbank business Focus on local currency mortgage and consumer loans funded by local deposits FX loans only in EUR for clients with EUR income (or equivalent) and where funded by local FX deposits (RO, HR & RS) Savings products, asset management and pension products Large, local corporate and SME banking Advisory services, with focus on providing access to capital markets and corporate finance Real estate business that goes beyond financing Potential future expansion into Poland Focus on customer business, incl. customerbased trading activities In addition to core markets, presences in Poland, Turkey, Germany and London with institutional client focus and selected product mix Building debt and equity capital markets in CEE Financing sovereigns and municipalities with focus on infrastructure development in core markets Any sovereign holdings are only held for marketmaking, liquidity or balance sheet management reasons Focus on banks that operate in the core markets Any bank exposure is only held for liquidity or balance sheet management reasons or to support client business Potential future expansion into Poland 20
Additional information: shareholder structure Total number of shares: 429,800,000 By investor By region UNIQA Versicherungsverein Privatstiftung Harbor International Fund 4.1% Lone Pine Capital 4.0% Erste Stiftung, direct 10.8% Other 2.5% 4.1% Erste Stiftung, indirect * 9.3% Continental Europe 23.3% Austria 40.8% 9.9% CaixaBank 1.0% Employess UK & Ireland 7.8% Institutional investors 47.2% 9.6% Retail investors 25.6% North America * Including voting rights of Erste Foundation, savings banks, savings banks foundations and Wiener Städtische Wechselseitige Versicherungsverein 21