RBI won't rule out exit from shaky CEE markets like Ukraine

By bne IntelliNews November 19, 2013

Tim Gosling in Prague -

Raiffeisen Bank International cannot rule out an exit from Hungary, Slovenia and Ukraine, it said in a statement on November 18. Although the second largest Central and Eastern European lender added it has no immediate plans to sell local units, the announcement will do little to shore up confidence in what are some of the shakiest banking markets in the region.

In a press release intended to "clarify" media reports and prevent "false expectations among investors" following comments a few days earlier from new CEO Karl Sevelda, RBI insisted it has not reached an agreement to sell its Ukrainian subsidiary Aval. However, it admitted that it is in talks over the bank.

"At this point in time there is no intention to sell the Ukrainian Raiffeisen Bank Aval and consequently there is no corresponding resolution," the statement reads. It then adds "that various parties with interest in purchasing Raiffeisen Bank Aval have approached RBI. As RBI is continuously reviewing the environment, dialogues have been entered into with these parties, in order for the offers to be evaluated and a basis to be established for a decision as to whether and at which price the Raiffeisen Bank Aval could be sold."

It then admits that it is reviewing its operations in Hungary and Slovenia, which like Ukraine are struggling under uncertain economic, policy and regulatory conditions. "In addition to the Ukraine, markets such as Hungary and Slovenia are currently under special review and a withdrawal from these markets cannot be excluded," the statement continues.

RBI has been looking to slash investment in CEE since Sevelda was appointed to head the bank in June. His predecessor Herbert Stepic, who had spearheaded an aggressive push into the region during his time at the helm, had his resignation accepted on June 7 following press reports concerning offshore investments. The policy since has only supported speculation at the time that Stepic was forced out by shareholders unhappy at RBI's emerging market strategy.

Less than a month into his tenure, Sevelda announced a "massive" cost-cutting plan targeting "triple-digit million" euro savings in Hungary and Slovenia. A rising level of bad loans has blighted the banks in both countries. That has put RBI under pressure to raise fresh capital, a move that was forced on compatriot Erste Bank Group - CEE's third largest lender - in August.

In Slovenia, the government is struggling to hold off the stress on the banking system long enough to allow it to sort out the financial mess without needing to ask for help from the EU and International Monetary Fund (IMF). In Hungary, the government has placed a huge tax burden on the sector, and is pushing for a scheme to reduce foreign-currency debt that is likely to push lenders into further losses.

Sevelda told journalists at a press conference on November 14 that RBI was in talks about offloading the Ukrainian unit, and that it would scale down its business in Slovenia and Hungary, make better use of regulatory allowances, and increase earnings, before attempting to pay off €1.75bn in state aid, which it must do by 2017. "That's another four years," the new CEO noted. "I don't see any reason for stress toward a capital increase."

However, while Ukraine is off to the side somewhat, RBI remains loth to leave a Hungarian market that was seen as part of the Central European core until Fidesz took power in Budapest in 2010. The loss reported by the banking sector in 2011, provoked by government policy, shocked because it was the first dip into the red for 13 years.

"We want to stay in Hungary, you shouldn't forget we went there in 1987 as the first eastern European market," Sevelda said, according to Portfolio.hu. "There's a lot of heart and soul in that. Hungary as a neighboring country certainly has a higher priority."

Yet with the Hungarian government pushing to introduce a new scheme to help foreign currency borrowers, it may be a sacrifice it is forced to make. it has already shrunk its Hungarian balance sheet by €1bn.

"RBI's statement is in line with management's target to optimise its business outside the top six markets," note analysts at VTB Capital. "In our view, there could be further newsflow about disbursing the group's assets as this might improve RBI's capital position and allow the bank to concentrate on developing on more important markets."

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