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Erste sinks as unveils $412 mln Iceland exposure

Austria’s Erste Group Bank holds €300 million ($412 million) in senior bank debt from major Icelandic banks, it said on Friday, sending its shares down as much as 17% in Vienna.


Erste Bank, the third-biggest lender in emerging countries in Europe, cut its 2008 profit forecast as recently as Tuesday, while Iceland was close to financial meltdown on Friday after the government this week seized control of three of the country’s biggest banks. Analysts’ estimates varied regarding the level of writedown the bank would be likely to incur on its Iceland debt, ranging from 50% of its value to the full amount.

“Obviously this is not good for investor confidence,” said Marion Swoboda-Brachvogel of brokerage CA Cheuvreux. “They gave a profit warning just a couple of days ago and now this. You’ve got to wonder, what comes next?”

Shares in Erste were suspended in Vienna until after midday, fell 17%, and were halted again after a few minutes. They dropped as much as 25% in early trade at the Prague Stock Exchange before being suspended there too.

Swoboda-Brachvogel said she expected Erste to write down the Iceland debt by at least 50%, but possibly more, and that this would reduce Erste’s net profit by at least 6%. Wood & Co analyst Jiri Stanik, who revealed Erste’s exposure in a note to clients on Friday morning, said his base case was a total writedown of the debt, which would lead to a 20% reduction in net profit “I admit this is a worst-case scenario, but this is right now my base-case scenario,” Stanik said.

Erste said it would give an update on its targets with the release of its third-quarter results due on Oct. 30.



Erste said its Iceland exposure was split between the country’s major banks, and that it was currently impossible to determine the recovery rate for the debt. “Erste Group’s exposure to Iceland, mainly in the form of senior bank debt split between the major Icelandic banks, is limited to €300 million,” Erste said in a statement. “As the settlement procedures have not yet started, recovery rates are (yet) to be determined.”

Implied recovery rates of Icelandic banks, which are based on the prices of credit default swaps, stood at 18% for Kaupthing senior debt, 16.5% for Landsbanki senior debt, and 13.3% for Glitnir senior debt, according to data from Markit.

Regulators and banks across Europe were scouring balance sheets this week to identify their exposure to Iceland bank debt. Finnish financial watchdog Rata said on Friday the Nordic banking sector’s exposure was €210 million, and that it was impossible to estimate the losses that would generate.

Erste’s Austrian peer Raiffeisen Zentralbank, the parent of listed Raiffeisen International, said on Friday it holds Icelandic bank debt but declined to say how much and said its capital ratio targets were not in danger.

Erste Bank had on Tuesday cut its 2008 earnings outlook, saying it now expected net profit to rise “only slightly” after previously forecasting a 20% rise, adjusted for the one-off gain from the sale of an asset. It blamed the financial markets crisis for the profit warning, saying that weak global markets would weigh on its trading result and lead to further writedowns of its portfolio of US debt instruments. (Reuters)