Raiffeisen International Bank (RBI) is set to sell assets, as well as divest portfolios, in a bid to reduce the pressure on its capital from the Ukraine crisis and the hike in the value of the Swiss franc, it told analysts in a conference call on January 29.
RBI, the second largest lender in Central and Eastern Europe, is heavily exposed to the decline in the ruble, because Russia has been its most profitable market. The Swiss National Bank's shock removal of its cap on its currency to the euro on January 15 has also sparked concerns over RBI's portfolio of CHF mortgages in countries such as Poland, Croatia and Romania.
Those risks have led to fears that RBI could default on subordinated loans, while shareholders have become wary that it could seek another round of new capital after it raised €2.78bn in February. RBI's hybrid bonds were recently trading at €0.58 to the euro according to the Financial Times, while to January 28 the stock had dropped close to 28% since the start of the year.
The Austrian bank issued an ad-hoc statement on January 28 announcing that it is working on a plan to extend its capital buffer by reducing risk-weighted assets (RWA) by at least 20%. It also stressed that its current core Tier 1 capital ratio - a measure used to show a bank's ability to withstand losses - is at a relatively healthy 10% of RWA.
The conference call the following day offered some details. First off, RBI stressed it will not look for another capital increase. That did most to drive a massive recovery in its shares, which were trading 12.72% higher in the afternoon session on the Vienna bourse on January 29.
Rather, the plan will involve "a combination of an organic reduction of risk-weighted assets and also perhaps a sale of portfolios or also the possible exit of units", CFO Martin Gruell told analysts. The organic reduction means allowing short-term loans to expire.
Erste estimates that, based on RBI's total RWAs, the programme should enable the bank to shed around €16bn in assets. However, Gruell insisted that there is no rush, calling it a "medium term" project. "I'm not worried that we can execute it. Mind you, this is not a fire sale. We are not in a rush," he said according to Reuters. More details are expected on February 9, when RBI releases 2014 financial results.
Erste suggests RBI was left with little option but to pipe up now, given the building pressure. "Following the recent sharp price drops of RBI's share and bonds, management had to calm down the markets," they write in a note, suggesting the announced programme is a "strong statement".
"Overall, we think that the announcement took a lot of pressure off RBI's share price," they sum up
Heading for the exit
However, the announcement of potential asset sales will set off no little speculation over which of the 15 countries it currently operates in should expect an RBI exit. The target of reducing the balance sheet by €16bn presumably means it will need to find buyers for several units.
Russia, the bank says, is not on the list. While the plunge of the ruble in recent months is hitting the unit, and will mean RBI will have to become "more selective" in lending, it remains the bank's most profitable market. "We do not expect excessive further provisioning requirements for 2015," Greull reported.
Meanwhile, the Austrian bank failed last year in efforts to extract itself from Ukraine, where it has faced huge losses. The extended war in the east of the country, and the country's slide towards economic meltdown, means it has halted the sale process.
There has been recent speculation that RBI is looking to sell its Polish unit, which it is in the midst of listing in Warsaw as part of its commitments made during its acquisition. However, RBI would not be drawn on the suggestions. A Polish exit would likely be tough, because regulator KNF has stated several times its opposition to further consolidation in the banking sector, and would likely apply extremely strict conditions on any potential buyer.
RBI puts its exposure to CHF loans in Poland at €2.9bn. However it said in the conference call that asset quality deterioration is not much of a concern. That could suggest the Austrian bank might not be too keen to leave what is one of the most promising markets over the medium term.
Meanwhile, RBI said in late 2013 that it was ready to listen to offers for its Hungarian business, as it looked to have tired of the punishment handed out by the government to foreign banks over forex loans. However, it soon retreated when it got just one offer, of €1.
At the same time, Budapest has now pushed through the conversion of forex loans and is understood to be seeking a deal to relieve the pressure on the banks in return for increased lending. Though the worst may perhaps be over now, RBI may still struggle to attract bids at a good valuation for a unit that holds a large portfolio.
It may be in South Eastern Europe then, plagued by non-performing loans in recent years, that RBI looks to offload businesses. In both Croatia and Romania the bank admitted in the January call that it faces increased costs.
Tough new legislation and exposure to CHF loans of €270mn in Croatia mean raised costs, it said, though RBI guided that the hike will be incremental at around €5mn per year. In Romania, higher provisioning of €15mn-20mn can easily be absorbed, it claimed.
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