Austria's RBI finally gets serious about exiting Russia

Austria's RBI finally gets serious about exiting Russia
Hoping against hope that the Ukraine war will soon be over no longer looks like an option, so the Austrian bank will most probably have to take a big hit to its equity from disposing of its Russian business. / bne IntelliNews
By Robert Anderson in Prague March 30, 2023

Raiffeisen Bank International (RBI), the most exposed Western bank left in Russia, appears to be finally bowing to pressure to quit the country where it made 60% of its net profit last year.

Hoping against hope that the war will soon be over no longer looks like an option, so the Austrian bank will most probably have to take a big hit to its equity from disposing of its Russian business, though it insists it would still be comfortably above regulatory minimums.

In a statement at the bank’s annual general meeting in Vienna on March 30, RBI said it was working intensively to assess all options, including a Russian exit. “The RBI Group and its stakeholders are in an unprecedented situation, and we recognise the urgency for action which the war has created,” the bank said.

The options RBI is looking at reportedly include the sale of the business as a whole, the splitting off of the Russian business into a separate entity, and the swap of its loans for those of Russia’s Sberbank that are trapped in Europe by sanctions.

A senior Raiffeisen executive told the Financial Times the bank had narrowed discussions to two “viable” bidders and the bank was hopeful it could agree terms for an exit this year.

A “plan B” is a spin-out of its Russian business into a separate European-listed entity.

RBI has not been able to take its profits out of Russia since the invasion. Previously, RBI was reported to be considering swapping €400mn worth of profits trapped in Russia for the blocked European funds of Russian state-controlled bank Sberbank. However, such a deal could be a seen as a violation of sanctions.

“You have to look at any and every option in which you could get any portion of your capital out of Russia,” said a banking analyst who follows RBI.

Under pressure

RBI, which is the most important Western bank left in Russia, has come under intense pressure from the US authorities and from the European Central Bank (ECB) to move faster to exit its Russian business, though its continued presence has been defended by Austrian politicians.

According to Reuters, the US Treasury’s Office of Foreign Assets Control (which oversees compliance with US sanctions) has asked the bank for details of its exposure in Russia, the partially occupied Donbas, Ukraine and even Syria, including details of transactions and certain clients' activities. 

The ECB is also reportedly putting pressure on RBI to speed up its planning for an eventual exit.

“The pressure is now on again. I can’t image the pressure going forward easing at any point in time,” one banking analyst told bne IntelliNews.

This all just adds to the grave reputational damage the bank is suffering from its Russian connection, with critics pointing to the huge profits it is making there. RBI also still maintains a much smaller operation in sanctioned Belarus.

RBI’s workforce in Russia actually rose last year to 9,000, and it is taking part in the Kremlin’s scheme to give loan holidays to troops fighting in Ukraine and write off their loans if they are maimed or killed.

RBI is the 10th largest bank by assets in Russia, and – alongside Italy’s UniCredit – is the only one to be categorised as systematically important. It has become the largest facilitator of financial transfers into Russia over the Swift network, accounting for up to 40% of all payments in and out of the country, according to the Financial Times.

This vital role in the payment system is keeping trade ticking over despite Western sanctions, though the bank points out that it is largely servicing Western blue-chip companies still operating in Russia.

Its share price plunged by 60% from February 10 just before the invasion to March 7. Currently the shares trade around €14.42, down one third from January 1, 2022 before the invasion. 

This means RBI – the second largest bank operating across Central and Eastern Europe by assets – is trading at a multiple of 30% of book value, compared to around 70% for Austrian rival Erste Bank, the largest cross-border bank operating in Emerging Europe. At this share price, RBI’s Russian business has a negative value.

Given the rock bottom price, most analysts have a ‘buy’ on RBI, but for investors concerned with ESG factors the bank is still untouchable, given its Russian presence.

“For a fair share of the investor community RBI is uninvestable because of the Russian connection,” an analyst who follows the bank told bne IntelliNews.

More and more dependent

RBI’s dilemma is that over the last year since the invasion it has become more, not less, dependent on its Russian business. Even though it has virtually ended new lending there, with the loanbook falling €9bn or 30% y/y by the end of December, profitability has soared.

RBI was an early entrant into Russia in 1996, where it rapidly built up an extremely lucrative trade finance business, later setting up a highly successful retail banking operation that is now one of the five biggest privately owned commercial banks in the country. Risk-weighted assets were €15.8bn at the end of 2022.

Despite the volatility of the ruble, return on equity in Russia has averaged 20% over the past eight years, and in most years Russia represented one third of profits. Last year it was 60%.

“Russia was just meant to be an add-on but it became so successful it became strategic,” said one analyst who follows the bank.

Leaving Russia would therefore be extremely painful. The bank group’s return on equity was 27% last year, but a much more mediocre 9% if Russia, Belarus and Bulgaria (where it has sold its bank) are excluded.

As well as the loss of its future profit stream, RBI would be likely to have to sell its Russian operations at a huge discount. The only major bank that managed to quickly pull out of Russia following the full-scale military invasion of Ukraine was France's Societe Generale, which sold its fully-owned Rosbank to oligarch Vladimir Potanin in May 2022.

According to a report by Kommersant, the sale was at only 20-30% of book value. Societe Generale took a €3.1bn write down from the deal.

Any sale would also require official approval and sellers have to make a 10% donation of the transaction value to the government. It could also be complicated to repatriate any sale proceeds back to Austria.

RBI insists it could take the hit from the loss of its Russian business, which has a book value of €4.2bn. It says that in even the worst case scenario its core tier one equity ratio would remain about 13.5%, comfortably above the regulatory minimum of around 11%. The bank’s transitional CET ratio at end 2022 was 16.0% compared to 13.1% a year ago.

Chronic problems

But the loss of Russia would bring into high relief RBI’s chronic problems of running a wide network of typically small banks in often high-risk markets with volatile currencies, while having a capital base that is difficult to reinforce because of the majority stake still held by regional Austrian landesbanken and local Raiffeisen banks.

RBI is present in 13 markets but only has a top five market presence in four medium to larger-sized countries: Austria itself, Romania, Czechia and Slovakia. Russia, where it ranks 10th, is by far the most profitable.

In the past, profits from Russia have offset losses elsewhere. That option would no longer be available, though the group would be significantly de-risked.

The loss of the Russian profit stream could also make it difficult to maintain the balance among RBI’s shareholders.

Following a merger with its struggling Austrian parent RZB in 2017, the Austrian regional and local banks were left with 59% of RBI shares.

These regional and local banks have often struggled to remain profitable in the overbanked Austrian market and have relied on RBI’s dividends, forcing RBI to commit to dividends rather than equity strengthening.

However, dividends were cancelled on 2021 profits and on March 30 the AGM agreed to a board proposal to hold over dividends on 2022 profits until the situation becomes clearer.

This tension would only grow in the future without the Russian profits, making it even more difficult to reinforce RBI’s capital base. Meanwhile, another equity issue remains problematic because the cash-strapped local Austrian banks would struggle to participate, and this could therefore endanger their majority stake. Instead, RBI may be forced to cut costs and operations to ensure its equity matches its risk-weighted assets.