Raiffeisen Zentralbank Österreich (RZB), the Austrian co-operative bank parent of Raiffeisen Bank International (RBI), the listed CEE lender, have agreed in principle to merge, the banks’ management and supervisory boards announced late on October 6.
RZB and RBI said in May that they were examining a merger as a way of reinforcing their capital buffers in the face of tougher regulatory requirements following the global financial crisis.
July’s stress tests by the European Banking Authority (EBA) estimated that RZB’s fully loaded CET 1 ratio, a key measure of capital strength, would fall to 6.12% in a crisis from 10.6% in the second quarter of this year, the third worst figure in the EU.
RBI, which is 60% owned by RZB, had a 12.2% CET 1 ratio at Q2. Together the two banks would have had a ratio of 11.3% in Q2.
The merger will mainly benefit RZB. Some of RZB’s capital is also due to be discounted under new EBA rules that will take effect in 2019, which will only allow it to count its own share of subsidiaries’ capital, rather than the whole. Moreover, merging with its daughter company will allow the combined entity to benefit from potential equity raises, something RZB finds virtually impossible now because of its complex co-operative structure.
To further shore up its capital, RZB is also planning to sell shares in insurer Uniqa, which CEO Walter Rothensteiner has said will boost the bank's fully-loaded CET 1 ratio by 0.6 percentage point.
If approved by RBI shareholders by at least a 75% majority of those present at a meeting planned for January 24, RZB will be merged into RBI through an issue of new RBI shares that will increase the total by around 10-13%. The free float will be reduced from 39.2% to around 34.6-35.7%, the banks estimate. The limited nature of the dilution helped RBI's shares up by 2.8% to €14.39 in early trading in Vienna on October 6, the highest figure so far this year.
RBI will maintain its existing financial targets following the merger. RBI, the second largest non-Russian CEE lender by assets, has been restructuring since it made its first full-year lost in 2014, in order to cut costs, reduce risk weighted assets and bolster its capital strength.
In its Q2 results, RBI’s fully-loaded CET ratio increased to 12.2%, compared to 11.5% at the end of 2015. This means it met its capital buffer target of 12% by the end of 2017, much earlier than planned and without the still ongoing disposal of its large Polish operations.