Investing.com -- Erste Group Bank AG (VIE:ERST) has been downgraded to a "neutral" rating by analysts at UBS Global Research, marking a shift from its previous "buy" stance, in a note dated Tuesday.
Shares of the Austrian bank were down 5.1% at 08:23 ET (13:23 GMT).
The downgrade is primarily driven by concerns over capital distribution, profitability sustainability, and limited short-term upside potential compared to sector peers.
Before its latest earnings report, Erste’s stock had risen by 36% over the last three months and outperformed the SX7P index by 4.2%.
However, following the results, the stock saw a 7% decline. UBS analysts partly attribute this previous outperformance to investor optimism over a potential ceasefire between Russia and Ukraine, which could support corporate loan growth and asset quality in Central and Eastern Europe (CEE).
However, the anticipated capital return narrative did not fully materialize in the Q4 results, prompting a reassessment of Erste’s investment case.
Erste maintains a strong capital position, with a Basel IV pro-forma CET1 ratio of 15.6% at the end of Q4 2024.
This allows for robust organic risk-weighted asset growth in 2025, which UBS estimates will result in approximately €3 billion in excess capital by year-end, representing 12% of Erste’s market capitalization.
Despite this, the bank’s management appears more focused on inorganic growth opportunities rather than immediate capital returns to shareholders. As a result, investors are left with an 8% distributed yield for 2025—below the sector average.
UBS forecasts a 10% distributed yield in 2026, assuming a €1 billion share buyback, but notes that this may not be sufficient to justify holding the stock given the availability of similar yields elsewhere in the sector.
UBS has also reduced its earnings per share estimates for Erste by 3-6% for 2025-2027. This downward revision is attributed to higher costs, increased risk provisions, and a higher share count from reduced buyback assumptions.
The analysts flag that Erste had benefited from multiple EPS upgrades over the past two years due to improved company guidance, but with the bank’s 2025 targets now set, there is little room for further upside.
The broader European banking sector saw an average 5% EPS upgrade in Q4 2024, making Erste’s outlook appear less attractive in comparison.
Profitability is another key concern. While Erste has achieved a return on tangible equity (ROTE) of at least 16% over the past two years, UBS projects a decline to 14-15% in 2025-2027 unless the bank increases capital distributions, which is not the base case scenario.
The analysts also cite mid-single-digit cost increases, mainly due to inflation-driven wage hikes and IT investments, as a limiting factor for earnings growth.
UBS acknowledges Erste’s strength as the leading universal banking franchise in the CEE region, with a well-developed digital banking presence and solid growth prospects.
However, in the broader European banking context, Erste is no longer seen as the best option for CEE exposure. UBS favors OTP Bank for its strong volume growth and presence in Ukraine and Russia, as well as Komercni Banka (PR:BKOM), which was recently upgraded to a "buy" rating due to its strong pre-provision profit growth.
The new 12-month price target for Erste is set at €65, a modest 3% increase from the prior target of €63. This valuation is based on a balance between the lower EPS projections and a 50 basis point reduction in Erste’s cost of equity, reflecting lower interest rates and decreased equity risk premiums in the region.