Raiffeisen Profit Drops as Bad Debt Mounts Ahead of ECB Review

Raiffeisen Bank International AG (RBI), the Austrian firm that’s eastern Europe’s second-biggest bank, reported third-quarter profit that fell 5 percent on higher bad debt charges in Slovenia and on large corporate loans.

Net income declined to 134.4 million euros ($182.5 million) from 141.5 million euros a year earlier, the Vienna-based company said in a statement today. The average estimate in a company survey of 24 analysts was for a 127 million-euro profit. Loan-loss provisions rose 47 percent to 330 million euros, less than the analysts predicted.

“We want to become significantly better and we are therefore aiming at holding the 2016 cost base flat compared to 2012,” Chief Executive Officer Karl Sevelda said in the statement. “We have developed and started a comprehensive cost savings program for the entire group.”

Sevelda, who took over in June, is trimming expenses and scaling down business in Ukraine, Hungary and Slovenia to raise profits and reduce risks as the European Central Bank gears up to review its assets. While investors and regulators push for a share sale to boost capital, the bank’s parent RZB, ultimately owned by 494 local cooperatives, opposed a rights offering in March last year, saying the stock price was too low.

Raiffeisen has dropped 13 percent this year in Vienna trading, while the Bloomberg Europe Banks and Financial Services index rose 17 percent during the same period.

Bad Debt

The increase in provisions for bad loans, which Raiffeisen warned about in September, was driven in part by a doubling of those charges in Slovenia, which is reviewing banks’ assets in a precursor to the ECB’s euro-area exam of about 124 lenders that runs into next year. Raiffeisen was among banks whose executives the ECB briefed about its test this week.

About 10.3 percent of loans were non-performing at the end of September, Raiffeisen said, up from 9.9 percent three months earlier, mainly driven by Slovenia, and by large Austrian corporate clients. The coverage ratio, gauging the provisions set aside to cover loan losses, dropped to 66 percent.

Raiffeisen will cut costs by as much as 450 million euros by 2016, it said in September. The reductions will focus on southeastern Europe, Ukraine and Belarus, Raiffeisen said. The biggest savings are seen in cheaper procurement, improvement of computer systems and a review of its branch network. Raiffeisen hired consultants to design the plan, it said.

Capital Drops

Austria’s third-biggest lender’s core Tier 1 capital ratio, a measure of financial strength, dropped to 10.1 percent in the quarter from 10.4 percent at the end of June, partly due to the decline of the Russian ruble versus the euro. That ratio includes 2.5 billion euros in state aid and linked capital that is being phased out by regulators by 2017.

Analysts at Deutsche Bank AG said last week the ratio was only 6.9 percent without that capital, and recommended Raiffeisen sell 2 billion euros in new shares. Raiffeisen reiterated that a share sale remains an option and depends on market developments.

Sevelda said Nov. 15 that he’s not “under stress” because of that distant deadline and won’t be rushed into a dilutive share sale. The bank’s current market capitalization is about 5.4 billion euros.

To contact the reporter on this story: Boris Groendahl in Vienna at bgroendahl@bloomberg.net

To contact the editor responsible for this story: Frank Connelly at fconnelly@bloomberg.net

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