UPDATE 3-Erste drops as eastern European revenues disappoint

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By Boris Groendahl

VIENNA, April 30 (Reuters) - Austria's Erste Bank der oesterreichischen Sparkassen posted a 25-percent rise in first-quarter net profit, beating forecasts but disappointing investors with a weak revenue mix that weighed on its shares.

Eastern Europe's second-biggest lender raised net profit after minorities to 302 million euros ($411 million), 4 percent more than the average estimate in a Reuters poll, mainly because its trading income and tax rate came in better than expected.

But its main revenue source, interest income, was below forecast and analysts said the better than expected performance did result from its mature domestic Austrian business, not the eastern European franchise investors hope to buy with Erste.

"For a growth stock, better Austrian but weaker central and eastern European results are likely to come as somewhat of a disappointment," Merrill Lynch analyst Stuart Graham wrote in a note to clients.

Erste shares dropped as much as 4.2 percent to its lowest level in almost four weeks, making it the worst performer in the central Europan NTX index and dragging down rivals like OTP , Raiffeisen and Bank PKO .

"Despite the beat at the bottom line these look like a slightly disconcerting set of numbers," said Cazenove analyst Piers Brown.

Trading income -- which derives from a bank's own dealing in securities and other assets and is a volatile revenue source -- was the biggest positive surprise in Erste's results, coming in 37 percent higher than a year ago, at the top end of forecasts.

But net interest income missed the average forecast despite rising by 25 percent, as a drop in Hungary and competition in Romania weighed -- refreshing doubts whether the 3.75 billion euros Erste paid for Banca Comerciala Romana was well spent.

Fee and commission income rose 28 percent and was better than predicted. Loan loss provisions, also keenly eyed on emerging markets, rose 18 percent, in line with estimates.

GROWTH HOPE BCR

Erste Chief Executive Andreas Treichl, who topped a buying spree in central Europe with the BCR takeover last year, said in a statement he stood by his pledge to raise 2007 group net profit by at least a quarter and BCR's by 40 percent.

Amid a merger frenzy among European banks, in which Erste is seen by analysts as a possible target in a few years' time, Treichl reiterated that his bank will be busy this year with digesting the BCR acquisition.

"We have ... set the course for the remaining quarters," Treichl said. "The main focus of our work this year will be to integrate BCR into Erste Bank Group, to expand our Ukrainian subsidiary and to implement our new organisational structure."

BCR contributed 44.3 million euros to net profit, which would have risen by 10 percent without it. Erste did not provide year-ago comparisons for BCR, but said new products and cost cuts would help the results in the second half of the year.

"With the 40-percent net profit target for 2007 unchanged and delivery likely to be back-end loaded, we feel the debate on BCR delivery remains open, at least in the near-term," Merrill Lynch's Graham wrote.

Erste's share price has risen by 2 percent this year, making it one of the worst performers among banks in emerging Europe. They changed hands down 4.2 percent at 58.94 euros by 1127 GMT, which would be their biggest one-day drop since last June.

The stock trades at 14 times next year's estimated earnings, less than its peers as investors remain sceptical about the merits of its expensive BCR acquisition and growth prospects in more developed eastern European countries.

To read the Erste analyst poll , click on [ID:nL26311231]

(Additional reporting by Karin Strohecker)