Raiffeisen Bank International (RBI), the struggling Austrian lender, reported better than expected third quarter results on November 12 and forecast an overall profit for the full year, though much of the improvement came from the delay in implementing restructuring targets until next year.
RBI, the second biggest non-Russian bank by assets in Central and Eastern Europe, reported net profit of €90mn in the third quarter and €378mn for the first three quarters. It revised its guidance for the full year to a small consolidated profit, having previously warned that it might be lossmaking.
“We expect a small consolidated profit for 2015 as the majority of restructuring costs will be incurred after 2015,” Chief Executive Karl Sevelda told an analysts’ conference call. RBI has only booked €24mn in costs this year so far and will now book a total of just €100mn in 2015, out of an expected maximum of €550mn, having previously guided that most of the costs would fall in 2015.
Profits were also boosted by lower than expected net provisions of €191mn though Sevelda hinted that they would be elevated in the final quarter.
The main negative news in the third quarter was a new provisioning charge of €75mn to take account of the Croatian government’s plan to force banks to convert all Swiss franc loans into euros at the exchange rate when they were taken out.
RBI’s shares closed down 1.6% at €14.01 in Vienna on profit-taking, down 12.55% on the year.
Analysts at Erste Group said the results were “a positive surprise” as the bank presented a net profit instead of an anticipated loss. However, they said “risk costs in the final quarter could be very, very high, potentially exceeding last year’s €633mn mark”.
After making its first full-year loss last year, RBI announced in February that it plans to scale back its operations, in an attempt to boost its core capital ratio to keep up with its peers and meet increased requirements imposed by regulators.
Following the restructuring, the bank expects to have a fully loaded tier one capital ratio - the key yardstick used by regulators to measure a bank’s balance sheet strength – of 12% by the end of 2017, in a year when Austrian regulators are recommending banks hold core capital of at least 11%. At the end of the third quarter RBI’s fully loaded tier one capital ratio stood at 10.8%, up 0.1 percentage points on the previous quarter.
However, a recent survey by JP Morgan singled out RBI as the only big Eurozone bank that would need to increase equity if European regulators succeed in harmonising capital rules across the bloc. JP Morgan estimates that RBI will have an equity shortfall of €1bn under the discussed changes, around 30% of its stock market value.
Under its restructuring plan, RBI will sell its Polish and Slovenian operations, as well as internet bank Zuno, and will scale back lending in Russia, Ukraine and Hungary. This will raise cash and help rebalance the bank’s lending portfolio, but more importantly it will lower RBI’s risk weighted assets (RWA) by almost a quarter, which will in turn improve its tier one capital ratio.
As well as scaling back its network, RBI also plans to cut its €3bn cost base by 20% from 2014’s level by the end of 2017. In the first three quarters, general administrative expenses were down 8.5% compared to last year. The plan should lower its cost-income ratio, currently 57.4%, closer to 50% in the medium term.
The sale of RBI’s Slovenian bank is in a “very advanced stage”, Sevelda said, and would “most likely” happen in the next month, while the sale of Zuno to Alfa Bank of Russia will be completed in the first quarter of 2016.
However, the sale of RBI’s much larger Polish bank, Polbank, has been delayed by the uncertainty over how the new Law and Justice government will force banks to convert their portfolios of Swiss franc (CHF) loans into zloty. The burden of these loans on borrowers has soared after the Swiss franc appreciated strongly earlier this year.
RBI has decided to carve out Polbank’s CHF portfolio of around €3bn in loans (leaving it with assets of around €10bn) and is in the process of restarting the sales tender. It has also written off all of Polbank’s goodwill in the third quarter in a €96m impairment.
“In Poland we do see some delay because of the political situation and regulatory issues,” Sevelda said. “We will most likely carve out the Swiss franc portfolio and sell them to a [special purpose vehicle] and then restart the tender process.” He said the SPV deal would be signed in the first half of 2016, to be followed by the initial public offering of Polbank, and then the closing of the bank sales transaction. By following these steps “we believe we will get more offers from European banks”, Sevelda said.
In terms of the scaling back of its lending and network, Sevelda said the rightsizing of the Hungarian network had been completed with the closure of 45 branches over the last year, and “in 2016 we might see a positive result in Hungary”, helped by cuts in the banking levy. The net profit was €18mn in the third quarter. Most lenders have made years of losses in Hungary because of a concerted campaign by the populist Fidesz government to squeeze profitability and make banks pay some of the higher burden of foreign exchange loans on borrowers.
In Ukraine, Sevelda said performance had been so much better than expected that RBI could try to renegotiate the price tag on the sale of a minority stake in Raiffeisen Aval to the European Bank for Reconstruction and Development. The bank had closed 53 branches over the past year and made a €1mn net profit in the third quarter. “We might go back to the EBRD and renegotiate the sales contract,” he said.
In Russia, long RBI’s main cash cow, the bank made a €73mn profit in the third quarter, with new provisions lower than expected in the current recession. Profits in the fourth quarter will be boosted by a gross €87mn from the sale of the bank’s pensions business. Nevertheless Russia’s share of RBI’s total bank profits was now at its lowest ever level at around 30%.