Visible outperformance fuelled by rate hikes Erste and RBI have outperformed the sector by 15% and 14% respectively in the past 3 months (+17% and +6% respectively YTD). Besides favourable macro conditions which have supported loan growth (+3.7% in H1 21 for both) and kept provisions low (cost of risk of 10bps and 24bps respectively in H1 21), the material rerating of Austrian banks in the past few months was in our view primarily driven by the tightening of monetary policy in several CEE countries. In this note we upgrade our earnings estimates further. Our 2022e net income estimates are now 8% and 18% above consensus for Erste and RBI respectively (5% and 17% above for 2023e). Erste Bank. Downgrade to Neutral on valuation grounds Erste has been one of our top picks in the sector since May. However, at c.1.2x 2021e TBV for a 2022-23e ROTE of 11.3-4% it has now reached fair value in a sector context. In our view the strong operating momentum and the likely further tightening of monetary policy in some of the countries where the bank operates are well understood by market participants and already adequately reflected in the valuation multiples. We note that our estimates already embed a cost of risk of 27bps in 2022-23e (below management guidance of a normalised cost of risk of 30bps) and further rate hikes in Q4 21 and 2022. With a FL CT1 ratio of 13.9-14% in the forecast period excess capital is also not particularly large. Raiffeisen. Valuation remains disconnected from fundamentals RBI trades on a 2021e P/TBV of c.0.7x for a 2022-23e ROTE of 9.7-10% (10.7%-10.9% excluding provisions on CHF mortgages). The stock has had a good run in the past few month, but in our view remains significantly undervalued (30% P/E discount vs the sector). In our view the positive operating momentum underpinned by rate rises and strong macro far outweigh the risks associated with the timing and magnitude of future losses on Polish CHF loans. Additionally,...