Erste Group Bank will raise about 660 million euros ($867 million) in equity and repay state aid in the third quarter, it said on Monday, forecasting operating profit would fall as much as 5 percent in 2013 rather than holding steady.
Central and eastern Europe's No. 3 lender said it would repay 1.76 billion euros in non-voting participation capital it got when the financial crisis began. Two-thirds came from Austria and the rest from private investors.
Erste had said in April that not diluting shareholders with a rights issue was a high priority for the bank.
The stock fell as much as 7.1 percent to 20.40 euros by 0730 GMT. The Stoxx European banking sector index was flat.
Analyst Dirk Becker at Kepler Cheuvreux said it was disappointing that Erste gone back on its promise not to issue shares, but that Austrian regulators wanted the bank to replace at least a third of the capital being repaid.
"The short-term performance of the stock could now be negative because of the upcoming rights issue but we believe the long-term story remains attractive," he said in a research note, keeping his "hold" rating for the time being.
Erste said it expected a slight improvement in economic performance for the region in the second half, even though growth rates would remain moderate.
"Erste Group expects the operating result to decline by up to 5 percent in 2013, due to expected lower operating income only being partially off-set by lower operating cost," it said.
Its risk costs were set to fall about 10-15 percent in 2013, mainly due to improvement in Romania, where it reiterated it expected to make a profit this year.
Erste said repaying the increasingly expensive capital would save 149 million euros after tax in 2014 and 158 million in 2015, rising in subsequent years, and was expected to help improve earnings per share from 2014.
It said it planned the capital increase via a rights issue "subject to market conditions and the approval by its management and supervisory boards".
"The planned capital increase ... will further strengthen Erste Group's capital base so that Erste Group expects to meet its targeted 10 percent fully loaded Basel 3 common equity Tier-1 ratio by December 31, 2014," it said.
_0">ING analysts questioned whether Erste's move could prompt Austrian peer Raiffeisen Bank International under its new management to "make a copycat move to tap equity markets and repay its chunk of participation capital".
Erste has been trading at nearly 10 times 12-month forward earnings, a premium to Raiffeisen on nearly 8 times, said StarMine, which ranks analyst estimates by forecasting accuracy. Raiffeisen declined to comment except to reiterate that a capital increase was an option depending on market conditions.
J.P. Morgan Securities, Morgan Stanley Bank and Erste itself will run the Erste capital increase.
Adjusted for proceeds from the capital hike, Erste's core Tier 1 ratio under capital adequacy rule Basel 2.5, excluding participation capital and retained earnings in the first quarter, would have been 10.2 percent instead of 9.6 percent.
It estimated the switch to Basel III standards would have a negative impact of 30 basis points.
_5">It is also switching its method of calculating risk-weighted assets in Romania in 2015, which it said would have a negative impact of about 40 basis points on capital ratios.
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