DBRS Morningstar Confirms Erste’s Issuer Ratings at A (high)/R-1 (middle); Stable Trend

DBRS Ratings GmbH (DBRS Morningstar) confirmed the ratings of Erste Group Bank AG (Erste or the Group), including Issuer Ratings at A (high) / R-1 (middle). The trend on all ratings remains Stable. Erste’s Intrinsic Assessment (IA) is A (high) and its Support Assessment is SA3. In addition, DBRS Morningstar confirmed other ratings, including the Issuer Rating of A / R-1 (low) of Erste’s subsidiary in Slovakia, Slovenska sporitelna, a.s. For a complete list of ratings, please see the table at the end of this press release.

KEY CREDIT RATING CONSIDERATIONS

The ratings takes into account the Group’s leading retail banking franchise in Austria and Central and Eastern Europe (CEE), with more than 16 million customers and EUR 343 billion of assets as of end-March 2023. In addition, the ratings also reflect solid profitability ratios in 2022, and good geographical diversification, with Austria, Czech Republic, Slovakia and Romania being the Group’s main operating areas. The Group has a strong liquidity profile, with solid funding and liquidity ratios and positive deposit dynamics during the pandemic in most of its operating regions. The confirmation also reflects that Erste’s operating environment has improved over the past 12 months, as the economic impact of the energy crisis following on from the Russian invasion of Ukraine has been more moderate than initially anticipated. As a result, the Bank´s asset quality ratios remains sound. Nevertheless, DBRS Morningstar expects there to be a manageable asset quality deterioration in coming quarters following the rapid transition to a normalised interest rate environment in some of the Group’s geographies. Lastly, the rating recommendation considers the Group’s adequate capital profile, with a capital cushion which is slightly below some other European peers.

CREDIT RATING DRIVERS

An upgrade of the long-term ratings of Erste would require an improvement in the Group’s capital cushions combined with a sustained track record of solid and consistent profitability metrics over the longer term, while demonstrating solid asset quality metrics throughout the economic cycle.

A downgrade of Erste’s long-term ratings would arise from a material deterioration in the risk profile, particularly within the Eastern Europe region, without an appropriate increase in capitalisation. A significant sustained weaking on its earnings profile would also have negative rating implications.

CREDIT RATING RATIONALE

Franchise Combined Building Block (BB) Assessment: Strong / Good

Erste Bank provides universal banking services to individuals, small and medium-sized enterprises and large corporations in Austria and CEE. With around 16.1 million customers and around EUR 343 billion of assets as of end-March 2023, Erste is the largest Austrian consolidated banking group by assets. The Group is well positioned in its core markets which include Austria, the Czech Republic, and Slovakia where it has market shares above 20%, as well as in Romania, Hungary and Croatia, where it operates with markets shares above 10%. In addition, the Group has operations in Serbia. DBRS Morningstar considers Erste’s franchise as well-diversified in terms of business areas and geographies, although we also note that the Group’s operating regions are relatively correlated, somewhat reducing the diversification benefits. In terms of total assets. At end-March 2023, Austria accounted for 58% of the Group’s total assets, Czech Republic 21%, Slovakia 7%, and Romania 5%.

Earnings Combined Building Block (BB) Assessment: Good

DBRS Morningstar consider Erste´s earnings profile as sound. The Group reported FY 2022 net attributable income of EUR 2.2 billion, up by over 12.5% Year-on-Year (YoY), mainly driven by net interest income (NII), which was up by 19.6% YoY thanks to increased interest rates across all of the geographies where the Group operates, coupled with strong credit growth. Net fee & commissions also increased by 6.5% YoY on the back of the Group’s payment services and asset management services. The Group expects a positive outlook for core revenues in 2023 coupled with contained cost of risk. The Group´s solid revenues in 2022 were partly offset by higher operating costs (also impacted by higher levies on bank activities), lower trading gains and higher loan loss provisions. Erste reported strong results in Q1 2023 with net profit at EUR 594 million, which was up 32% YOY. This result was boosted by higher interest rates mainly in Austria, Hungary and Romania. DBRS Morningstar expects the Group to continue to benefit from higher NII in coming quarters as the loan book fully reprices at higher interest rates although we see the benefit as being partially offset by an expected increase in deposit costs.

Risk Combined Building Block (BB) Assessment: Strong / Good

DBRS Morningstar considers credit risk as the main risk of Erste, in particular their household and corporate portfolios, which accounted for 47% and 46% of its gross loan book respectively at end-2022. Erste’s asset quality profile has remained sound despite the challenging environment following the Russian invasion of Ukraine. The Group’s Non-Performing Loan (NPL) ratio stood at 2.1% (as calculated by DBRS Morningstar) at end-March 2023, down from 2.3% at end-March 2022. In addition, the Group has very significant total coverage of Non-Performing Exposures (as defined by the EBA) of 99% at end-2022, which is higher than many European peers. Nevertheless, DBRS Morningstar considers that the Group operates in some regions with weaker credit risk fundamentals compared to its home country. At end-March 2023, Erste’s exposure to Commercial Real Estate (CRE) is EUR 15.8 billion and it comprises 8.1% of total gross loans and remains well diversified. We continue to monitor these exposures given the challenging environment and the potential long-term implications of the pandemic for the CRE sector. Another source of risk is the Bank´s fixed income portfolio, which represented 15.9% of total assets at end-2022. Most of the fixed income portfolio is held in the amortised cost book (78.7% at end-2022), reducing capital sensitivity to credit spread changes. Nevertheless, for the fixed income portfolio, we take into account the potential risks from unrealised losses on the back of the recent spike in interest rates.

Funding and Liquidity Combined Building Block (BB) Assessment: Strong

Erste’s funding is underpinned by its leading franchise in its core markets, where the Group maintains strong market shares for deposits. DBRS Morningstar notes that the Group’s customer deposits grew by 11% YoY in 2021 and 6.4% YoY in 2022, reflecting good liquidity conditions for European banks. The Group’s net loan to deposit (LTD) ratio (as calculated by DBRS Morningstar) stood at around 94% at end-March 2023. The Group’s LCR and NSFR ratios are also solid and remain above regulatory requirements. The share of retail sight deposits stood at 58.4% but down from 61.9% in Q1 2022. In addition, the Group had as of Q1 2023 an outstanding TLTRO III amount of EUR 15.2 billion (4.7% over total assets) which is expected to decrease to EUR 6.8 billion (2.1% over total assets) at YE 2023.

Capitalisation Combined Building Block (BB) Assessment: Strong / Good

Erste’s phased-in CET1 capital ratio at end-March 2023 was 14.1% down from 14.4% at end-2022. This fall in the CET1 capital ratio was mainly driven by increases in RWAs due to business growth, and remained above the Group’s minimum requirement of 10.81%. Capital requirements for Erste are increasing as a result of increases in the countercyclical capital buffer (CCyB) during 2023 in 5 out of its 6 core markets. As a result, the capital buffer over minimum requirements on CET1 has tightened and remains below some other European peers. DBRS Morningstar notes that Erste continues to be well positioned to meet its Minimum Requirement for own funds and Eligible Liabilities (MREL) requirements. The Group’s resolution strategy is that of a multiple point of entry (MPE) approach, meaning the MREL requirement is established at each resolution entity. Furthermore, the Group communicated its intention to buy-back up to EUR 300 million of its shares in 2023, this is subject to regulatory approval.

In addition, DBRS Morningstar has confirmed the ratings of Slovenska sporitelna, a.s. (SLSP) including Issuer Ratings at “A” / R-1 (low), with a Stable trend. SLSP has a SA1 support assessment, which implies strong and predictable support from the Parent. As a result, SLSP’s ratings will generally move in tandem with Erste’s ratings. The SA1 designation considers SLSP’s important role as a core component of Erste’s international franchise and DBRS Morningstar’s expectation that Erste has the willingness and ability to support SLPS, if required.

Further details on the Scorecard Indicators and Building Block Assessments can be found at https://www.dbrsmorningstar.com/research/417373.

ENVIRONMENTAL, SOCIAL, GOVERNANCE CONSIDERATIONS

There were no Environmental, Social or Governance factors that had a significant or relevant effect on the credit analysis.

A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework can be found in the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Rating (4 July 2023) https://www.dbrsmorningstar.com/research/416784/dbrs-morningstar-criteria-approach-to-environmental-social-and-governance-risk-factors-in-credit-ratings.

Notes:
All figures are in EUR unless otherwise noted.

The principal methodology is the Global Methodology for Rating Banks and Banking Organisations (22 June 2023) https://www.dbrsmorningstar.com/research/415978/global-methodology-for-rating-banks-and-banking-organisations. In addition DBRS Morningstar uses the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings https://www.dbrsmorningstar.com/research/416784/dbrs-morningstar-criteria-approach-to-environmental-social-and-governance-risk-factors-in-credit-ratings in its consideration of ESG factors.

The credit rating methodologies used in the analysis of this transaction can be found at: https://www.dbrsmorningstar.com/about/methodologies

The sources of information used for this credit rating include Morningstar Inc. and Company Documents, Erste 2017-2022 Annual Reports, Erste Q1 2023 Quarterly Report, Erste Q1 2023 Presentation, European Banking Authority (EBA) Transparency Exercise 2022. DBRS Morningstar considers the information available to it for the purposes of providing this credit rating to be of satisfactory quality.

With respect to FCA and ESMA regulations in the United Kingdom and European Union, respectively, this is an unsolicited credit rating. This credit rating was not initiated at the request of the issuer.

With Rated Entity or Related Third-Party Participation: NO
With Access to Internal Documents: NO
With Access to Management: NO

DBRS Morningstar does not audit the information it receives in connection with the credit rating process, and it does not and cannot independently verify that information in every instance.

The conditions that lead to the assignment of a Negative or Positive trend are generally resolved within a 12-month period. DBRS Morningstar's outlooks and credit ratings are under regular surveillance.

For further information on DBRS Morningstar historical default rates published by the European Securities and Markets Authority (ESMA) in a central repository, see: https://registers.esma.europa.eu/cerep-publication/. For further information on DBRS Morningstar historical default rates published by the Financial Conduct Authority (FCA) in a central repository, see https://data.fca.org.uk/#/ceres/craStats.

The sensitivity analysis of the relevant key credit rating assumptions can be found at: https://www.dbrsmorningstar.com/research/417374.

This credit rating is endorsed by DBRS Ratings Limited for use in the United Kingdom.

Lead Analyst: Pablo Manzano, CFA, Vice President - Global FIG
Rating Committee Chair: Elisabeth Rudman, Managing Director - Head of Global FIG
Initial Rating Date: July 20, 2022
Last Rating Date: July 20, 2022

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For more information on this credit or on this industry, visit www.dbrsmorningstar.com.