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

DBRS Ratings GmbH (Morningstar DBRS) confirmed its credit ratings on Erste Group Bank AG (Erste or the Group), including the Long-Term Issuer Rating at A (high) and Short-Term Issuer Rating at R-1 (middle). The trends on all credit ratings remain Stable. Erste's Intrinsic Assessment (IA) is A (high) and its Support Assessment is SA3. In addition, Morningstar DBRS confirmed other credit ratings, including the Issuer Rating of "A" on Erste's subsidiary in Slovakia, Slovenska sporitelna a.s. (SLSP). For a full list of credit ratings, please see the table at the end of this press release.

KEY CREDIT RATING CONSIDERATIONS
The credit ratings take into account Erste's strong banking franchise in Austria and Central and Eastern Europe (CEE), as well as its robust funding profile with a large customer deposit base and solid liquidity position. In addition, the credit ratings also reflect Erste's good geographical diversification and improving profitability, which has largely benefitted from the elevated interest rates in its core markets. Morningstar DBRS expects earnings to remain sound in the medium term, helped by a gradual acceleration of economic activity in the Group's core markets. Erste's capital remains adequate with sound capital buffers over the minimum requirements and the Group's asset quality remains sound with a low nonperforming loans (NPL) ratio and conservative NPL provisioning coverage. However, Morningstar DBRS expects mild asset quality deterioration in 2024 given the delayed impact from elevated inflation, high interest rates, and an economic slowdown.

CREDIT RATING DRIVERS
Morningstar DBRS could upgrade the long-term credit ratings if Erste were to maintain sustained strong profitability metrics and higher capital buffers while reporting sound asset quality indicators.

Morningstar DBRS would consider downgrading Erste's long-term credit ratings if there were a material deterioration in the Group's risk profile and/or sustained significant weakening of earnings.

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 16.4 million customers and around EUR 343 billion of assets as of end-March 2024, Erste is the largest Austrian consolidated banking group by assets. The Group is well-positioned in its markets, which include Austria, the Czech Republic, and Slovakia, where it has strong market shares for customer loans and deposits of around 20%, and Hungary, Romania, and Croatia, where it has moderate market shares of around 10%. Morningstar DBRS considers Erste's franchise relatively well-diversified in terms of business areas and geographies, although the Group's operating regions are strongly correlated. In October 2023, Erste appointed a new chief executive officer (CEO), who worked in the Group for nearly 25 years until 2021. Morningstar DBRS does not expect the change in CEO to cause a significant shift in strategy in the short to medium term.

Earnings Combined Building Block (BB) Assessment: Strong/Good
Erste's performance in 2023 remained strong, benefitting from its geographic revenue diversification and high interest rate environment in its core markets. The Group reported a net attributable income of EUR 3.0 billion in 2023, up by 38.5% year-over-year (YOY) and mainly driven by net interest income (NII) growth, which was up by 21.5% YOY thanks to elevated interest rates across all markets. Erste also reported 7.6% YOY growth in net fee and commissions on the back of the Group's payment and asset-management services. In 2023, operating expenses increased by 9.7% YOY amid inflationary pressures that led to higher salary adjustments in all markets. The cost-income ratio (CIR) declined to 47.6% in 2023 from 53.4% in 2022. In Q1 2024, the Group's net attributable income was EUR 783 million, up 32% YOY. The cost of risk remained relatively low at 18 basis points (bps) at end-Q1 2024, although this was slightly higher than the 6 bps in 2023 and 15 bps in 2022.

Risk Combined Building Block (BB) Assessment: Strong/Good
Erste has a conservative risk profile, and asset quality has remained sound despite the challenging environment in its operating markets. Nevertheless, Morningstar DBRS considers that the Group operates in some regions with weaker credit risk fundamentals compared with those of its home country. At end-Q1 2024, the Group's NPL ratio was 2.3% (as calculated by Morningstar DBRS), remaining largely stable compared with end-2023 but slightly increased from 2.0% at end-2022, mainly resulting from some defaults in the real estate sector. The NPL provisioning coverage ratio was conservative at 83.7% at end-Q1 2024, backed by an adequately collateralised loan portfolio. In addition, Erste has a sizeable exposure to the commercial real estate (CRE) sector, which accounted for around 10% of total gross loans at end-2023. Morningstar DBRS continues to monitor these exposures given the challenges in the CRE sector.

Funding and Liquidity Combined Building Block (BB) Assessment: Strong
Erste's solid funding profile is characterised by a sticky deposit base underpinned by its leading franchise in its core markets, moderate reliance on wholesale funding, and high liquidity buffers. In Q1 2024, customer deposits, which mainly comprise retail deposits, rose in all core markets, particularly Austria and the Czech Republic, to EUR 235.3 billion up from EUR 232.8 billion at end-2023. The Group's net loan to deposit ratio (as calculated by Morningstar DBRS) stood at around 97% at end-2023. Erste has a strong liquidity position, with liquid assets (cash and securities) accounting for around 22% of total assets at end-March 2024. The Group's LCR and NSFR ratios remain solid at 153% and 142%, respectively, at end-2023.

Capitalisation Combined Building Block (BB) Assessment: Strong/Good
Erste has an adequate capital position backed by strong earnings capacity. Erste's CET1 capital ratio at end-March 2024 was 15.2%, which remains well above the Group's minimum requirement of 11.3%. Capital requirements for Erste increased by 34 bps as a result of increases in the countercyclical capital buffer during 2023 in the core markets. Morningstar DBRS notes that Erste remains 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 approach, meaning the MREL requirement is established at each resolution entity.

In addition, Morningstar DBRS has confirmed its credit ratings on SLSP, including the Long-Term Issuer Rating at "A" and Short-Term Issuer Rating at R-1 (low) with Stable trends. SLSP has a SA1 support assessment, which implies a very high probability of 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 Morningstar DBRS' 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://dbrs.morningstar.com/research/436340/.

ENVIRONMENTAL, SOCIAL, AND GOVERNANCE CONSIDERATIONS
There were no Environmental/Social/Governance factors that had a significant or relevant effect on the credit analysis.

A description of how Morningstar DBRS considers ESG factors within the Morningstar DBRS analytical framework can be found in the Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings (23 January 2024), https://dbrs.morningstar.com/research/427030

Notes:
All figures are in euros unless otherwise noted.

The principal methodology is the Global Methodology for Rating Banks and Banking Organisations (4 June 2024), https://dbrs.morningstar.com/research/433881. In addition, Morningstar DBRS uses the Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings (23 January 2024), https://dbrs.morningstar.com/research/427030 in its consideration of ESG factors.

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

The sources of information used for these credit ratings include Morningstar Inc. and company documents. Other sources include Erste 2017-2023 Annual Reports, Erste Q1 2024 Quarterly Report, and Erste Q1 2024 Presentation. Morningstar DBRS considers the information available to it for the purposes of providing these credit ratings to be of satisfactory quality.

With respect to FCA and ESMA regulations in the United Kingdom and European Union, respectively, these are unsolicited credit ratings. These credit ratings were 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

Morningstar DBRS 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. Morningstar DBRS' outlooks and credit ratings are under regular surveillance.

For further information on Morningstar DBRS 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 Morningstar DBRS 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://dbrs.morningstar.com/research/436341.

These credit ratings are endorsed by DBRS Ratings Limited for use in the United Kingdom.

Lead Analyst: Halil Senturk, Assistant Vice President, European Financial Institution Ratings
Rating Committee Chair: Maria Rivas, Senior Vice President, Sector Lead, European Financial Institution Ratings
Initial Rating Date: 20 July 2022
Last Rating Date: July 19, 2023

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