Erste Group Bank AG

Thomas Sommerauer - Head of IR Andreas Treichl - Chief Executive Officer Willibald Cernko - Chief Risk Officer Gernot Mittendorfer - Chief Financial Officer

Pawel Dziedzic - Goldman Sachs Riccardo Rovere - Mediobanca Gabor Kemeny - Autonomous Research Alan Webborn - Societe Generale Johannes Thormann - HSBC Brajesh Kumar - Societe Generale Magdalena Stoklosa - Morgan Stanley Victor Galliano - Barclays

Thank you very much, operator, and a very warm welcome [Indiscernible]. To follow our usual conference call routine, [Indiscernible] will highlight the quarter and 9 months, after which [Indiscernible].

Before handing over to Andreas Treichl, let me highlight Page number two, [Indiscernible]. Andreas?

So good morning, ladies and gentlemen, let’s start with page number four, third quarter net profit flat vis-à-vis the second quarter at EUR363 million for the nine months down to EUR988 from EUR1,180 billion that’s in reality also a flat rates out for the nine months if you take out the VISA sale last year. If you go to page five, you’ll see basically a flattening out of the net interest margin and no reason for us to believe that this will change, so did stick around in that area a couple of interest rate interest moved from CEE central banks help on that.

If you look at the cost income ratio, not a very pleasant picture moving from 58 to 61, but it’s basically from second to third quarter flat NII, flat fee income. Trading income, slightly down by EUR20 million and costs up slightly up by EUR20 million and [Indiscernible] you go from EUR58 million to EUR61 million.

If you look at the cost of risk, it’s a good story, continued extremely low risk cost and as a result of both return on equity and the return on tangible equity went up in terms of return on tangible equity, 12.6% in the second quarter upto 13.2% in the third quarter. If you go to page six, you’ll see a really strong customer loan increase by 5.6%.

Again surpassed by deposit growth, we increased by deposit in the first nine months of the year by over EUR10 billion resulting in an increase of EUR7.5 and resulting in so far the lowest loan to deposit ratio actually that I could remember with 93% across the group. Now if you look at the key ratios on page seven, loans to total assets flat and NPL coverage actually improved and at the same time the NPL ratio decreased further by 60 basis points to 4.3% and the trend that we believe will continue during the next quarter.

Total capital decreased by 50 basis points to 17.7% due to a stronger growth. Core equity tier 1 to 12.4% on a fully loaded basis.

However, tangible equity increased above EUR11 billion, liquidity coverage ratio improved and the leverage ratio improved too. If you look at the business environment on page nine, continued healthy growth in throughout the region, however I think it was different connotations.

We are very satisfied with the structure of GDP growth in the Czech Republic and in Slovakia not so happy about the structure in Romania, too much consumption driven, too little FDI but the basic numbers are very positive in all countries, unemployment is going down and public debt actually across the region is on its way down. So from both a macro and a micro economic climate seems to be pretty strong in 2017 and the outlook for 2018 continues to remain strong.

On the interest rate side, we have basically the situation in the Czech Republic where we had another hike this week and we have slightly increasing trend in Romania, both very positive for us in the euro area and the other countries. Actually no news whether in this case you can’t say no news is good news.

It’s not good news we’d like to see a rate hike in the euro at some point in time during the next quarter. Due to the interest rate move of course a strengthening of Czech crown.

We don’t think that sort of their the risk of a dramatic appreciation I think the Czech crown is probably now at the level where it will say maybe increase a bit, but there’s not much more to be expected on that front. If you go to page 12, look at our market shares, I think in the long time this is the most positive picture that we’ve seen.

We are slightly increasing our market shares in the three major countries. Austria, the Czech Republic and Slovakia and I think we are closed to a reversal of the trend in Romania and have seen already that on the corporate side and the retail side already in Hungary.

If you look at the business performance and you see on page 14, where was the strongest loan growth in the Czech Republic? Again Slovakia and also Serbia while from a very low level, but we now also see a strong growth in the other markets.

Even for Austria, I mean overall loan growth is better than we would have expected and in Hungary you see a clear turnaround now. Basically the same picture on the deposit side, we are increasing our deposit volume across the board and actually we are growing faster than the markets, although we definitely are not doing it by pricing, I think that’s just giving the size and the distribution of assets in the different countries mostly for types of bringing their deposits to us.

If you look on the net interest income, relatively stable. You saw a bit of decline in the margin both in Erste Bank Austria and also the savings banks a slight decline vis-à-vis last year in the Czech Republic but stabling out at 2.50 and relatively stable in the other markets.

Fee income overall has been doing well. We said last year I think some point in time we would like to see a total of EUR2 billion of fee income.

I think we are quite well on track for that, but basically what you can say is that we are increasing our fees in a very broad sense on the asset management front that includes both securities and the insurance business and on the other hand we don’t grow as fast because loan related fees have been declining in the Czech Republic and in Slovakia, but that should be over now, so we are relatively positive on our gross potential on the fee income side. With that, I’d like to hand over to Willi who will continue on page 20.

Thank you. With regards to risk cost management we take different year comparison favoured to show an excellent risk performance supported by net releases across most geographies and also supported by improved recoveries.

When it comes to the NPL ratio we see currently a level of 4.3 and looking ahead as already Andreas Treichl mentioned there is room for further improvement so we have a good track. NPL sales down as already mentioned last time on a pretty low level , so it’s not anymore a rush as we have seen in 2016.

When it comes to the coverage ratio as shown on page 22, we see further improvements with the level of coverage, now we are close to 70 and I would say this is a very sufficient [Ph] level and it is offering a level of comfort, we can live with. I want to hand over to Gernot Mittendorfer

Good morning, ladies and gentlemen, we continue on page 26. As already mentioned the loan to deposit ratio was down to 93%.

We saw both growths on the loan side as well on the deposit side, but deposit is outperforming the loan development. And you can see on page 27 especially the performing loans chart growing year-on-year 7.5% which is including a certain portion of Czech crown related business activity relatively below margins, but in general we are around the target put forward for us of 5% loan growth.

At the same time, non-performing loans down to EUR6.2 billion minus 15% on a year-on-year basis, very solid development. We continue on page 29, geography and distribution of financial and trading assets.

No major changes vis-à-vis the last couple of quarters, the liquidity situation even and the liquidity buffer even increased over the last quarters and it’s just confirming our excellent liquidity position. We will continue on page 31, there on issues you see that we see a reduction of senior unsecured bonds because they are not replaced and the slight decrease, subordinated debt and the interbank deposit business hand in hand with the customer business was drawing as well in the last couple of quarters.

Page 32, shows you the maturity profile of our debts. As already seen over the last two years, a really stable maturity profile maximum EUR3 billion of maturities.

We’ve done mainly a mortgage covered bond of EUR750 million earlier in the year. Generally this year and we have done our second additional tier 1 transaction in the second quarter and we participated in the TLTRO with EUR1.70 billion and that was all our activity in the market for this year.

A quick look on the capable position page 33, we have seen a little bit of risk weighted assets inflation in the last two or three quarters, but the Basel III capital ratio phased in still at 5.8%, so confirmation of the trends we have seen in the last couple of quarters and the ratio in the third quarter doe s not include the third quarter profit. This is the usual activities that we are doing; we are not reviewing our first quarter and third quarter results.

And then the profit then is half year and full year. With this, I hand over to Andreas Treichl for a conclusion and the outcome.

Thank you very much. So as I said in the beginning, we continue to look rather positively at the economic development in our region, particularly Central and Eastern Europe, but also Austria seems to be doing relatively well in its outlook for 2018.

Our business outlook is first we confirm our target for 2017 and we repeat or we prolong our 10% plus the target for 2018. Please keep in mind that this is based on the average tangible equity in 2018.

In 2017, average tangible equity is around EUR11 billion flat and we do expect our average tangible equity in 2018 to be at least EUR11.8 billion, so EUR800 million higher upto EUR12 billion. That’s based on our continued assumption that we will grow our loan portfolio 5% plus and of course the recent rate hikes should help us on growing net interest income slightly next year.

The cost base again I think will remain about in the area where we are this year. We are still investing heavily in the digitization of our back office and as we announced last year those investments will continue throughout 2018, so on a currency adjusted basis, more or less flat costs for 2018.

What are the risks for that outlook basically as all over Europe major risk are political, unforeseen political actions. We have things pretty well under control and actually we don’t believe that our region for the moment or in 2018 will be the highest risk region in Europe that has been passed on to other countries in the mean time.

With that, we’re ending our presentation. We are ready to take any questions you might have.

Good morning and thank you for the presentation. Just two questions from my side.

The first is really a clarification on your guidance. You mentioned that your flat to slightly positive revenues will capture 5% loan growth and rate hikes.

But can you clarify what level of rates you expect in your forecast or expectations, in other words do you only count the ones that were done or any future rate hikes as you go along in particular in Czech Republic? And then also on clarification, can you explain a little bit better how you get to the flat end cost next year.

And in particular if you look at this quarter, have you see a wage inflation that pushed personal expenses up 3%. You know IT expenses that pushed admin cost up 3% you know so how do we square this going forward in 2018, we’ve actually a flat cost base.

And then my second question is just on the securities business and performance of fees and trading. It seems like it’s weaker this quarter, can you give us some color why was that?

Is that any particular reason, you mentioned that you want to grow assets and management fees going forward. I mean should we look into this quarter as perhaps something that is you know maybe just seasonally lower or should we actually see this as a maybe a sign of weakness going forward?

Thank you.

Well I think if you look on the NII side, we had an action yesterday, so with those actions that have been taken already we have the effects in 2018 throughout the whole year, and so it should have a positive effect. In addition there are most people expect another rate hike in the Czech Republic later on next year, so that would be extremely helpful.

Net cost does not include any currency adjustments if the Czech crown is moving, strengthening further than this would definitely have a negative effect on our cost, but overall it will be positive because the income will be translated at a higher euro rate as well and the same is true for capital position, but overall we are positive that the balance wage inflation that we are seeing in some countries by cost discipline somewhere else and flat means plus minus 1% for us. So this is the target for next year and we are positive that we can achieve that.

Now on the trading line there was a evaluation, a negative impact coming from valuations in the third quarter underlying customer business was performing as expected.

And just maybe a few clarifications. So in your guidance you don’t capture any future rate hikes, is that correct?

We have included one hike in the Czech Republic. We have no rate hikes in the year or so.

Understood. And maybe then to understand a little bit better flat, this flat cost base, what type of – if you can give us a flavour, you know what type of personal growth you would expect to see within the group next year?

Again your guidance, yes your guidance explicitly said you expect wage inflation across the region, so I’m wondering what type of personal growth you would expect to see..

Not across the region. I mean in Austria we are not expecting, a similar wage pressure as we are seeing in Czech Republic or Slovakia for example.

So, we will see areas where we have 2%, 3% cost gross on wages in some of our countries, but we will see countries where we have flat development as well.

So if we look at this quarter and we see 3% just this quarter, what drove this increase then? I’m just trying to reconcile what we see in this quarter with guidance and I will leave it at that, that’s my last follow up?

I think if you look at this year we said 1% to 2% cost inflation and if you look at the year-on-year development we have exactly in line with the guidance. So the quarterly development has to do with certain bonus pool accruals and these kind of things.

So there, we have bonus where we have a little tick up, and where we have quarters where we are tick down. But the important thing is the year-to-date performance and this is exactly inline with what we said.

Understood, very helpful. Thank you.

Yes good morning to everybody. Two questions if I may.

The first one is if you can give a little bit more clarification on what you mean when you say the ROTE in 2018 is going to be more than 10%. If you think, what does it really mean?

First question. The second question I have is on risk-weighted assets if I divide the credit risk weighted assets by the loan book this quarter, the inflation [Ph] the risk weight goes up despite you had three, at least three quarters of improving asset quality conditions, NPLs going down, you have reverse of this time, so I was wondering whether this is happening, why this is happening and whether we might eventually expect an improvement in PDs, LGDs and so on, having an impact on your credit risk, risk weighted assets going forward.

And the other thing related to that the increase in operational risk if that is over or we should expect something more in the future? Thank you.

Yes let me start on the clarification on the 10% plus. First of all, it represents a floor.

Secondly, it represents our expectation of the different components P&Ls for 2018 and we believe there is an upside potential. If we could be more specific, we would be more specific, but you can’t take it as anything else as our re-assurance that we believe that those 10% are hopefully given for us.

If we go beyond that and if we have the feeling during the next first or the second quarter of next year that we can increase that target we will, but for the moment that’s all we can say and I think you have to understand that particularly the risk side is at an extremely low level where sort of one happening like we have last year in Croatia can have a huge influence on our P&L. So the extremely low level of risk also results in a bit higher volatility.

So take it as a floor [Ph] with some upside potential.

On the risk-weighted assets question, on the op risk you see the -- on Page three [ph] the explanation. I mean, we've included the highest court decision on the interest rate and the model is as usually over reacting on this and we are positive that any developments are all going forward and then when we get an approval of the new model then we should have a more stable development and lower op risk charge.

On the credit risk-weighted assets we had add on one of our models of 1.7 trillion, it is [Indiscernible] and this was enjoying a higher quarterly development. In the second quarter, we had to include the IRB impact of the Romania or BCR switching to IRB.

There we had a couple of events. And this year when rating our risk weighted asset figures.

Going forward we should get better ratings again because as you rightfully pointed out the underlying portfolio quality has improved and you can see it on the risk line, you can see it on the NPL flows and the new business development is very stable.

Okay. Thank you very much.

Is something on the credit risk weighted assets? Is it something you think we could see relatively soon, a possible improvement of a internal ratings?

It's difficult to charge, because this is always an interaction necessary as well with regulator. There are difficult to estimate the timing, how long it takes.

We are definitely positive that we will get relief in the next year, but fixing a quarter for this is difficult.

Okay. All right.

Thank you very much. Thanks.

Hi. Thanks for the presentation.

Now, on your revenue guidance, can you comment on your Romanian rate sensitivity? You also mentioned Romanian rate tax in your guidance and you haven’t got policy rate hike so far, but the interbank rates went up quite significantly.

If you could give us a flavor what sort of benefit does this imply? And you were previously guiding for an up to 100 million NII hit from the treasury book.

I wondered how this changes with the recent increase in the interest rates? If you could give us an update on this and perhaps indicate whether you are now reinvesting your bound maturities at these somewhat higher rates?

Well, the impact is definitely smaller than with this rate environment and we are slowly starting to look at markets and investing a little we are not now making up everything what we have. Not done in the full year, but this is definitely helping.

And Romania, the market rates are supporting but its not such a significantly impacted. A rate hike in the Czech Republic has a bigger impact on our group P&L than Romanian market rates, but its definitely helping.

Its I think is more the composition of our deposit base and a long growth we have a bit stronger consumer loan growth, overall loan growth in Romania has picked up and on the deposit side, share of current account as a percentage of total deposits is also increasing, and that with increase money rates is somewhat helpful.

Okay. And can you give us a sense, how much of your Romanian loans is linked to the base rate or the interbank rate?

Around 50% [ph]. Base rate, I think, its about half of the loan book.

Okay. So just a little more broadly, you are seeing a positive mix shift in your loan book at least in Romania.

You see a lower charge from the treasuries. We had a few more rate hikes, and if I look at the nine months 2017 performance, you kept your NII and your core revenues reasonably stable.

So, I wondered whether this positive developments will feed through to your flat to slightly NII guidance. So most likely if I take this into account this would imply a sort of NII increased next year.

I wondered what you’ve think about that?

It didn’t exclude this guidance and even if compare it to this year we said, at best, flat revenues. For next year we are looking turnarounds on the revenue line.

And the more it is actually a better for us. So we are taking if its happening.

So if you look at our guidance, if you can look at it in a different way we do very specifically not exclude the potential of an increase in net interest income.

Okay. That’s helpful.

I think thank you.

Hi. Its Alan Webborn at SocGen.

Your answer to Gabor's question, the guidance that you’re giving on sort of the revenue side is what a flow as well, because today stable margins and 5% loan growth and growing fee income simply don’t come to a flat revenues, so can you just sort – we understand that you want to cautious at this time of year, but the environment is clearly better. You said, margins should be stable therefore you should grow revenues.

Am I missing something? Maybe is there a bigger impact from maybe unwinding effect than we think or something like that.

I mean, could you just sort of help us out there, because clearly your ability to grow revenues next year looks better than what you’re saying in your presentation, in your outlook, and I’d like to understand why if it just caution or is been more to it than that? And I guess the second part was your other income, your other result income remains sort of stubbornly high.

And there doesn't seem to anything, any one item in the sort of third quarter, but certainly in the CEE it all seems to be a little bit more negative. Really, can you give us a bit more of a flavor of what’s going on in that line for the quarter after quarter?

And do you have a potential to actually improve that line? Or is it simply a way you put all the other costs you can’t think of whether to put that would also interesting?

Thank you.

Okay. I think your first question, I really think its being cautious and we continue to believe that it is appropriate to be cautious and to hopefully be able to positively surprise.

There is nothing else behind it. On the other income side you have a couple of fixed components in there, which we manage to bring down that was the bank levy.

Then you have the contributions into the resolution fund, which are fixed. And the rest, as you put it, there is some volatility less than rates.

But I won’t say that we have kept sort of the other income item on a high level. I think what we manage is to reduce the fixed burden.

But there is a risk component, and we mentioned that from I think quite often, I think, we believe that the volatility of political risk will continue, not only in our region, but in other regions. And not only does that hits our other income line, but as you’ve seen it also has that volatility, also has an effects on our risk weighted assets.

Any rash action in any country to retroactively change contracts that we have with our clients results not only in negative effect on the P&L but it also results an increase in risk weighted assets. That’s something we have to deal with during the last years and I think we’ve gotten very professional in handling it, but I don’t think that’s phenomenon will go away.

Okay. That’s kind.

Thank you.

Good morning, everybody. Johannes from HSBC.

Two questions from my side. First of all, you said before that the Hungarian releases should have finished and now we see more release again, and often in other markets what is your underlying assumptions for like how long can releases continue?

Or in which markets would you at least expect that there are chances of continued releases looking at your book quality? And secondly, just in terms of playing the devil’s advocate of this question before, with struggling revenues, if cost control are tougher cost control not another option for you.

Why do you stick to your 1% adjusted cost growth for next year? Thank you.

When it comes to the releases I mentioned during the presentation, looking ahead I would expect let’s say, not that much benefiting as we did it in the past. So, we are aware that we’re slowing down [Indiscernible].

On the cost question we are working out on our cost line, but we still have regulatory projects that need to be finished and we will see how much of stabilization we need after going live with a lot of projects in the first six months, 2018. And then we are continuing investing in our digitalization.

So this is continuous development. And yeah, I think keeping the cost flat is already an achievement and if you look at our performance over the last couple of years, I think we have soon commitment over longer period and this we are planning to continue.

Over the last six or seven years you will see that costs have remained at that level and I think we said continuously last year and this that 2017 and 2018 we still have to invest and that doesn’t change our view that what we do right now should open up the opportunity for us from 2019 on to reduce our cost base quite substantially. This is our plan, but this too early to have that reflected in our outlook or anywhere.

So, we’re sticking to what we said last year, it will be 2017 and 2018, cost will continue to be flat and as Gernot said, if we are successful in implementing all regulatory promised in the first half of next year, we can take it from there.

Okay. Thank you.

Thank you and good morning, everyone. I’m Brajesh from SocGen Credit Research.

In terms of insurance plan last quarter you mentioned that you will look at 2018 plan sometimes in September. So now, can you get some more color around that?

On your slide 32 shows close to 1 billion senior unsecured maturing in 2018. So is it fair to assume that you will look to difference that?

And what about sub debt space, I mean, you were there to fill your AT1 bucket. Any plans out there?

Thank you.

Well, on the AT1 bucket we’ve done something this year now with the recent upgrade of Standard & Poor’s, we've now -- we are now investment grade with our AT1 and we have no hurry in issuing there. I’m not sure whether we will do anything there in 2018.

We will get our MREL indication in the first quarter next year and based on that and we will be starting to put together our insurance plan. But at the moment, we would see rather low issuance activities from us in 2018.

This is the current planning.

What about 2017? Are you pretty much done with your funding plan?

Or you will still be opportunistic and you may access markets let’s say, next few months?

We have done with our funding plans as usually if we think that there are great market opportunities and we will not see it next year then we might think about something, but even their recent decision of the ECB, I don’t think that we are missing anything if we are waiting for next year.

Okay. That’s very helpful.

Thank you.

Thank you very much. Good morning.

Magdalena Stoklosa at Morgan Stanley. I’ve got a couple of questions.

First is still on cost, but I wouldn’t want kind of any numbers around, I’m kind of more interested in your more kind of strategic thinking into 2019, which you’ve alluded to already. So my question really is there is a lot of moving parts in your cost base at the moment some of which we’ve already kind of spoken about on the call, so of course regulatory projects, George on the front and back inflation in or some inflation in labor cost and in CEE, of course, kind of any branch metric optimization.

But if we were to kind of to take all of that into account which ones or which combination of would you be most excited about longer term from the perspective of what impact will it potentially have on your cost base. That is my first question.

And the second is about your medium term dividend thinking, because of course we are seeing much stronger loan growth pretty much across the board, as you’ve mentioned in Austria in addition to CEE. So your risk-weighted assets growth is likely to be kind of business usual, stronger, but and what sort of kind of levels do you know think you want to operating at and in terms of core equity Tier 1 and what it could potentially mean for the dividend payout going forward?

Thank you.

Let’s me start on the cost side. I think you basically have three areas.

One is the regulatory driven cost issues where we have target and due dates to fulfill starting with IFRS 9, AnaCredit and other projects where we have regulatory deadline to fulfill. In order to meet those regulatory deadline, if we do not want to compromise a progress on our internal IT projects we were in a position that we have to hire externals in order to help us to get those projects done speedily.

Most of those projects are getting into the final stage in the first half of 2018, and from that on, I think we should be able to reduce a lot of the external resources that we have taken on during the last year. So at some point in time this will have a positive effect on our cost base.

The real affects however on our cost base is sort of the alignment of our local and the group data warehouses, which is a project that’s going on into 2019. On the digital front, we’re presently investing and the digitization of the backoffice is what I mentioned before, that is a cost project, George and the digital front office is a matter of investments but at a level that is so high that it really has a dramatic effect on the cost base.

So basically its number one, the pressure that we have from the regulatory front with most regulatory related projects that to be finalize during 2018. Unless they come up with Basel V, VI or anything new which don’t know for the moment but for the moment we believe that most of that can be done at this which then means full concentration on our own data warehouses with the ability to save costs as of 2019.

And then you have all the costs considerations on the front office side where we are basically reviewing constantly the composition of branch network and/or sales force and you could expect practically in all countries that the level of efficiency on that front will increase. However the impact of efficiency gains in the Czech Republic and in Slovakia will in our view will be somewhat offset by increasing wages, which I think is a natural in those countries as they’re picking fast.

Therefore the highest impact of course our efficiency gains in Austria and there you simply have to differentiate between those efficiency gains in Austria that we can achieve that not improve the cost income ratio but also improve our returns which are efficiency gains in our own distribution network and then you have those efficiency gains that improve our cost income ratio but do not have an effects in our return which are efficiency gains in the savings bank segment where there are substantially higher efficiency gains to be achieved on the front office side than in our own network, because we’ve done already quite a lot. So it’s a combination of three things that should reduce our cost base during the coming year.

On the CET1 ratio question, we still think 13% is the right fully loaded target at CET1 ratio. We’ve seen a little bit higher RWA development in the recent quarter but our baseline is still that loan growth should go hand in hand risk weighted..

Thank you.

On dividend payout, I think we are approaching the phase where we totally have a much clear feeling on what sort of the right CET1 ratio for us would be in agreement with all the different regulators under the hopeful assumption that the regulators can agree between themselves and that the rate should be around 13%. And as we said before, we do not plan to build up capital cushions substantially above our target core Tier 1 ratio.

We plan to distribute them to the shareholders. And that will determine the payout ratio.

So I think we’re close to 13% we see absolutely issue in achieving that. That’s a given for us and it will happen relatively soon.

And then, you will see a slowly increasing stable, but increasing dividend payout during the next years.

Thanks very much for that. Thank you.

Yes. My main questions have been answered but just a quick follow-up from me.

You did mention IFRS 9 on the regulatory side. Can you give us some indication or some sort of a range perhaps of how you see that impacting your CET1 on in January 2018?

Thank you.

Maximum 40 basis points.

Thanks very much.