DBRS Ratings GmbH (DBRS Morningstar) assigned first-time ratings to Erste Group Bank AG (Erste or the Group), including Issuer Ratings at A (high) / R-1 (middle). The trend on all ratings is Stable. Erste’s Intrinsic Assessment (IA) is A (high) and its Support Assessment is SA3. In addition, DBRS Morningstar has assigned ratings, including Issuer Ratings of A / R-1 (low) to Erste´s subsidiary in Slovakia, Slovenska sporitelna s.a. For a complete list of ratings, please see the table at the end of this press release.
KEY RATING CONSIDERATIONS
The A (high) Intrinsic Assessment (IA) takes into account the Group’s leading retail banking franchise in Austria and Central and Eastern Europe (CEE), with 16 million customers and EUR 326 billion of assets as of end-March 2022. In addition, the ratings also reflect solid profitability ratios, with a Return on Equity (RoE) of around 11% in 2021, and good geographical diversification, with Austria, Czech Republic, Slovakia and Romania 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. Erste’s ratings also reflect favorable asset quality metrics, with a solid NPL ratio and strong coverage ratios. Whilst the Group’s asset quality has remained sound throughout the pandemic, new risks have materialised following the Russian invasion of Ukraine. DBRS Morningstar does not expect the current conflict to have any immediate impact on Erste given the Bank does not have material exposures to Russia and Ukraine. Nevertheless, the indirect macroeconomic implications are likely to negatively affect the operating environment of Erste. The ratings also incorporate the Group’s adequate capital profile, with a capital cushion of around 363 basis points at March-2022.
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.
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.
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 million customers and around EUR 326 billion of assets as of end-March 2022, 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.
Earnings Combined Building Block (BB) Assessment: Good
As of end-2021, the Group reported record net income of EUR 1.9 billion, up from EUR 783 million at end-2020. The Group’s 2020 results, similar to most European banks, were affected by the impact of COVID-19, mainly through higher Loan Loss Provisions (LLPs). Nevertheless, 2021 results improved on the back of a more normalised Cost of Risk as well as strong revenue growth, driven by loan growth and robust fee performance. In 2021, Erste reported a solid RoE of around 11%, as calculated by DBRS Morningstar. The Group generated most of its Net Attributable profit in 2021 in Austria (38%), Czech Republic (26%), Slovakia (12%), and Romania (12%). The Group reported strong results in Q1 2022 with net profit reaching EUR 449 million, up 26% year over year (YoY). Q1 2022 results were negatively affected by higher contributions to the deposit guarantees schemes (DGS) of Hungary and Austria, due to the liquidation of Sberbank Europe AG and its subsidiaries. Nevertheless, a substantial part of these extraordinary contributions is expected to be recovered in Q2 2022. At end-March 2022, the Bank’s cost of risk remains low at around 13 bps, below their 2022 guidance at 20 bps. We expect NII to improve in 2022 due to higher interest rate levels in most of Erste’s operating regions, as well as higher cost of risk related to the recent deterioration of the economic environment.
Risk Combined Building Block (BB) Assessment: Strong/Good
DBRS Morningstar considers credit risk as the main risk of the Bank, in particular their household and corporate portfolios, which account for 49% and 45% of its loan book respectively at end-2021. Despite the COVID-19 outbreak, Erste’s asset quality profile has remained sound. The Group’s Non-Performing Loan (NPL) ratio stood at 2.4% (as calculated by DBRS Morningstar) at end-March 2022, down from 2.6% at end-2019 (prior to the pandemic). DBRS Morningstar considers that the Group has made a very significant effort to clean-up its balance sheet after the global financial crisis, when the NPL ratio peaked at 10.3% at end-2013. In addition, the Group has very significant coverage of Non-Performing Exposures (as defined by the EBA) of 98% at end-2021, 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. In terms of total assets, at end-March 2022, Austria accounts for 58% of the Group’s total assets, Czech Republic 22%, Slovakia 6%, and Romania 5%. DBRS Morningstar considers that the state guaranteed loans and loan moratoria prevented the deterioration of traditional asset quality metrics during the COVID-19 pandemic. As of end-2021, almost all of Erste’s loans under moratoria had expired (around EUR 13.8 billion or 7.7% of total gross loans) and the performance of the loans under moratoria has been better than expected. Lastly, the Group’s State Guaranteed Loans amounted to EUR 2.6 billion or 1.5% of the Group’s total gross loans at end-2021.
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 Bank’s customer deposits grew by 11% YoY in 2020 and 11% YoY in 2021, reflecting good liquidity conditions for European banks. The bank’s net loan to deposit (LTD) ratio (as calculated by DBRS Morningstar) has also seen improvement in recent years, and stood at around 87% at end-March 2022. The bank’s LCR and NSFR ratios are also solid and remain above regulatory requirements at 161% and 148% respectively at end-March 2022.
Capitalisation Combined Building Block (BB) Assessment: Strong/Good
The Group reported a regulatory common equity tier 1 (CET1) ratio of 13.9% and a Total capital ratio of 18.3% at end-March 2022 (these ratios does not include Q1 2022 profits). At that date, Erste’s CET1 ratio included around 23 bps of additional capital due to the transitional impact of IFRS 9. These ratios compared to an Overall Capital Requirement (OCR) at end-March 2022 of 14.43%, resulting in a capital cushion of 363 basis points at that period, below some other European peers. DBRS Morningstar notes that Erste is 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.
In addition, DBRS Morningstar has assigned ratings to Slovenska sporitelna s.a. (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.
For a complete list of ratings, please see the table at the end of this press release.
Further details on the Scorecard Indicators and Building Block Assessments can be found at https://www.dbrsmorningstar.com/research/400103
ENVIRONMENTAL, SOCIAL, GOVERNANCE CONSIDERATIONS
There were no Environmental/ Social/ 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 Ratings at https://www.dbrsmorningstar.com/research/396929/dbrs-morningstar-criteria-approach-to-environmental-social-and-governance-risk-factors-in-credit-ratings.
All figures are in EUR unless otherwise noted.
The principal methodology is the Global Methodology for Rating Banks and Banking Organisations (23 June 2022) https://www.dbrsmorningstar.com/research/398692/global-methodology-for-rating-banks-and-banking-organisations. Other applicable methodologies include the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings (17 May 2022) https://www.dbrsmorningstar.com/research/396929/dbrs-morningstar-criteria-approach-to-environmental-social-and-governance-risk-factors-in-credit-ratings
The sources of information used for this rating include Morningstar Inc. and Company Documents, Erste - Annual Report (2016-2021), Erste - Quarterly Reports (2016-Q1 2022), Erste - Presentations (2016- Q1 2022), European Banking Authority (EBA) Transparency Exercise 2021. DBRS Morningstar considers the information available to it for the purposes of providing this rating to be of satisfactory quality.
This rating concerns a newly rated issuer. This is the first DBRS Morningstar rating on this issuer.
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 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 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://cerep.esma.europa.eu/cerep-web/statistics/defaults.xhtml. DBRS Morningstar understands further information on DBRS Morningstar historical default rates may be published by the Financial Conduct Authority (FCA) on its webpage: https://www.fca.org.uk/firms/credit-rating-agencies.
The sensitivity analysis of the relevant key rating assumptions can be found at: https://www.dbrsmorningstar.com/research/400102
This 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: Ross Abercromby, Managing Director, Global FIG
Initial Rating Date: July 20, 2022
Last Rating Date: Not applicable as there is no last rating date.
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