Goodwill impairment, but guidance indicates good clean 4Q 12

Erste Group yesterday announced that the recent impairment tests for goodwill resulted in a write down requirement mainly on goodwill associated with Erste’s Romanian subsidiary BCR in the amount of EUR 300 mn pre-tax (around EUR 260 mn after tax). Remaining goodwill in BCR amounts to EUR 600 mn.

As a result of this extraordinary measure and the recently announced disposal of Erste Group’s Ukrainian subsidiary, Erste Group expects to post a net profit of about EUR 450 mn for the full year 2012. Erste Group confirms its guidance for operating performance (“operating result only slightly lower vs. 2011”) and risk costs (“about EUR 2.0 bn), as issued at its Q3 12 results announcement on 30 October 2012 and will propose to the annual general meeting to fully service participation capital as well as pay a dividend on ordinary shares for the 2012 business year.

Our current net profit forecast amounted to EUR 734 mn (similar to the Bloomberg consensus of EUR 733 mn). Including the impairment effect of EUR 260 mn (net) and the net charge of EUR 71 mn caused by selling the Ukraine subsidiary would result in an estimated net profit of EUR 403 mn. Today’s guidance of EUR 450 mn therefore indicates quite a good 4Q (EUR 183 mn vs.  EUR 144 mn in 3Q) which we attribute partly to a good trading result and on-going strong cost control. We therefore see the current news as neutral and do not expect a strong reaction of the share price.

Management stated that Erste will report significantly improved capital ratios as of year-end 2012. This should not come as a surprise as the 3Q figure (CT1/Basel 2.5 incl. partcap 10.4% ) does not include retained earnings and as we expect positive currency and AFS valuation impact directly booked in equity. The guided net profit of EUR 450 mn would translate into a net profit after servicing the participation capital of EUR 309 mn (EPS 0.78). Assuming a payout ratio of 30% would translate into a DPS of EUR 0.23. We therefore have to cut our current DPS estimate of EUR 0.40.