RBI on the long road to recovery

By bne IntelliNews August 19, 2015

Robert Anderson in Prague -


Raiffeisen Bank International (RBI), the struggling Austrian lender, posted better than expected profits in the second quarter, although it reiterated that it may still make a full-year loss.

The second biggest non-Russian bank by assets in Central and Eastern Europe, RBI more than doubled consolidated net profit in the second quarter compared to the first, to bring it to €204mn. Analysts had expected just €133m. RBI shares closed 6.9% up at €13 in Vienna, although that still left them one third lower than a year ago.

“All in all I am not entirely dissatisfied with our half year results,” says CEO Karl Sevelda. “The significant improvement of our capital ratios is particularly satisfying.”

RBI’s fully loaded tier one capital ratio - the key yardstick used by regulators to measure a bank’s balance sheet strength – improved by 0.8 percentage points on the previous quarter to 10.7%, boosted by profit retention and currency changes.

Net provisioning for impairments rose 27% in the second quarter compared to the first to €332mn. Non-performing loans were stable at 11.9% of total loans, while loan provisioning coverage increased 0.7pp to a robust 66.6% of non-performing loans.

RBI reiterated that it may make another full-year loss because of elevated loan risk costs – which will be higher in the second half - while most of the projected €550mn costs of its restructuring programme will also be booked then.

After making a 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. The bank hopes to have a fully loaded tier one capital ratio of 12% by the end of 2017, a year in which Austrian regulators will recommend banks hold core capital of at least 11%.

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 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% by the end of 2017. In the first half, general administrative expenses were cut by 8.6%. The plan should lower its cost-income ratio, currently 56.8%, closer to 50% in the medium term.

On a conference call with analysts, RBI admitted that the reduction in RWA and the sales processes were not progressing as fast as hoped, but insisted that they would be completed by the end of 2017 and that its core capital target was not in danger.  “We are not at all under pressure,” Sevelda told the conference call.

The sale of Polbank, by far the biggest asset on the block, has been torpedoed by an ongoing political debate in Poland on how much banks should contribute to help those who took out Swiss franc loans deal with the sharp appreciation of the currency this year. Polbank has €3.21bn in Swiss franc loans on its books, although only 1.8% of them are non-performing, and this exposure is hedged.

RBI said it does not expect the current bill going through parliament to be the final version and it would not provision for any likely compensation costs yet. Nor will it be hurried into a fire sale, it insists. "Every buyer prices the worst case into the sale price,” Sevelda says. “We want clarity in the situation and then will finalise our discussions after that is clear."

“We are not prepared to take any losses because of hurrying,” he adds. “Given our present capital ratios, we are not under pressure and will take all the time we need to do things properly.”

The Polish regulator is also still insisting that RBI fulfil its pledge to float the bank on the Warsaw Stock Exchange. It has also trumpeted its preference for any buyer of Polbank to be new to the market and to have a credit rating at least as high as RBI itself. 

The Austrian bank's CFO Martin Gruell says the regulator understands that in the current uncertainty, it is quite difficult to hold the IPO, which is still scheduled for mid-2016. He also confirms RBI is considering hiving off the Polish bank's Swiss franc loan book before any sale. “I am quite confident the remaining part will be more attractive,” he adds.

In Slovenia, offers for RBI’s unit have also fallen short of expectations and the bank is now preparing an alternative strategy of winding down the loan portfolio. Meanwhile, for Zuno, RBI is currently examining binding bids.

Among the problem countries where it plans to scale back lending, Sevelda says RBI’s profitability in Hungary has improved “significantly”. The bank could break even or make a just small loss in the full year, he adds.

In Ukraine, where non-performing loans represent 54% of the total loan portfolio, RBI was back in the black in the second quarter with a €25m net profit, though the bank still expects to make a full-year loss.

Sevelda says negotiations for the European Bank for Reconstruction and Development to enter RBI’s Ukraine unit are progressing well. “We are close to coming to a positive result in our negotiations with the EBRD, who will take a pariticipation in Raiffeisen Aval,” he told the conference call.

In Russia - historically one of RBI’s most profitable markets but one now in deep recession - the bank made a €180m net profit in the first half and Sevelda says RBI expects a positive result in the full year. “Russia is still doing fine,” he told the conference call. “Of course we do see increased risk charges but this is in line with our expectations.” 

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