Subdued Austrian Economy And Rate Declines Will Compress Margins And Reduce Future Earnings

Key Takeaways

• Subdued economic performance in Austria and rate declines may compress margins and reduce net interest income.
  
• A forecasted recession and corporate loan slowdown could increase non-performing loans, impacting future earnings negatively.
  
• Erste Group's strategic focus on organic growth, digital expansion, and regional strength in CEE supports robust financial performance and promising revenue prospects.

Catalysts

Provides a range of banking and other financial services to retail, corporate, and public sector customers.

• A projected loan growth of 3.5% year-to-date is tracking below the 5% target for 2024, particularly affected by weaker economic performance in Austria and subdued corporate loan demand. This could lead to lower-than-expected revenue growth.
  
• The impact of expected interest rate declines across their operating regions may contract the net interest margin as deposit repricing will outpace loan repricing, impacting net interest income negatively.
  
• The recurrence of a weaker economic climate, especially a forecasted shallow recession in Austria, could lead to increased non-performing loans (NPLs) and possibly higher risk costs, compressing future earnings.
  
• A dependency on the fixed-income portfolio and potential decreases in Central Bank placements could detract from net interest income growth if bond yields and coverage slip further, impairing revenue.
  
• While the retail segment showed improved housing and consumer loan volumes, a slower pace of corporate loan recovery could signal constrained revenue and earnings in the corporate banking sector if the economic backdrop in key markets like Germany does not improve.

Erste Group Bank Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Erste Group Bank's revenue will grow by 2.3% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 29.0% today to 24.7% in 3 years time.
• Analysts expect earnings to reach €2.8 billion (and earnings per share of €7.0) by about December 2027, down from €3.1 billion today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting €3.5 billion in earnings, and the most bearish expecting €2.2 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 10.3x on those 2027 earnings, up from 7.3x today. This future PE is lower than the current PE for the GB Banks industry at 13.1x.
• Analysts expect the number of shares outstanding to remain consistent over the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.42%, as per the Simply Wall St company report.

Erste Group Bank Future Earnings Per Share Growth

Risks

• Erste Group reported outstanding financial performance in Q3 2024, with growth in revenues, net interest income, and fee income, supported by low risk costs and a high return on tangible equity, indicating strong earnings prospects.
  
• The company upgraded its 2024 net interest income (NII) outlook due to strong performance in Central and Eastern Europe (CEE) and expects growth exceeding 2%, which could positively impact revenue.
  
• Asset management business reached an all-time high in assets under management, driven by strong sales in the Czech Republic, suggesting potential for increased fee income and enhancing earnings.
  
• The strategic focus on organic growth and digital platform expansion is enhancing efficiency and customer reach, aiming to improve revenues and profit margins.
  
• Although risk costs are expected to remain moderate, the robust asset quality across CEE operations and limited diversification in Austrian real estate risks underpin a stable net margin outlook.

Valuation

• The analysts have a consensus price target of €59.75 for Erste Group Bank based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of €71.0, and the most bearish reporting a price target of just €51.61.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be €11.4 billion, earnings will come to €2.8 billion, and it would be trading on a PE ratio of 10.3x, assuming you use a discount rate of 6.4%.
• Given the current share price of €56.04, the analyst's price target of €59.75 is 6.2% higher. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.