Raiffeisen Bank International AG (RBI), the foreign bank with the most at risk in Russia, shrugged off U.S. and EU sanctions against its most profitable market and said it has no plans to reduce its presence there.
Raiffeisen’s shares soared after the Vienna-based bank reported second-quarter net income climbed 53 percent to 183 million euros ($242 million) from a year earlier, according to a statement today. That beat the average estimate of 136 million euros in a company survey of 17 analysts, as interest income was higher and loan-loss provisions were lower than estimated.
“The impact of the current sanctions on our business is very low,” Chief Executive Officer Karl Sevelda told reporters in Vienna. “I don’t see any reason to question our business in Russia. We have proven our stamina in Russia in the past. We still consider Russia to be a very attractive banking market in the medium and long-term and therefore we will stay there.”
Raiffeisen, the second-largest bank in eastern Europe after UniCredit SpA (UCG), has relied on Russia as its biggest profit generator in the past three years. Sanctions imposed by the U.S. and the European Union in response to President Vladimir Putin’s stance on Ukraine are menacing that source of income as bad loans continue to eat into profit in other markets, like Hungary and Romania.
Raiffeisen shares rose as much as 11 percent, trading 9.3 percent higher at 20.38 euros by 12:37 p.m. in Vienna, their highest intraday level since Aug. 4. They are still down 17 percent this year, as the violence in Ukraine moved from demonstrations in the capital of Kiev to an armed rebellion in regions near the Russian border. The decline is the sixth-worst performance in the 45-member Bloomberg Europe Banks and Financial Services Index, which is down 1.3 percent this year.
“After the recent strong sell-off in the shares, the good second-quarter results and confirmed outlook could lead to a rebound in the short term,” said Thomas Neuhold, an analyst at Kepler Cheuvreux who recommends buying the stock. “We believe investors have become too bearish on the stock.”
While Raiffeisen’s Russian pretax profit fell 13 percent to 127 million euros, mainly due to rising provisions to cover problem loans, the business remained the most lucrative of the bank’s units. Moscow-based Raiffeisenbank ZAO is the third-biggest western-owned lender by assets and serves 2.7 million clients. It expanded its branches across the country to more than 200 after acquiring outlets from OAO Sberbank.
The EU added Russia’s three largest lenders, Sberbank, VTB Group and OAO Gazprombank, to its list of sanctioned institutions July 31, further tightening the limits on business there following the U.S.
Raiffeisen pledged “strict adherence to sanctions wherever applicable” in its investor presentation about the results. While Sevelda said the measures won’t have a big impact on Raiffeisen, he warned against tightening them.
“The further the run for sanctions progresses, the harder it gets to approach each other again,” Sevelda said. “I am convinced that good economic relations represent an important precondition for a peaceful coexistence.”
The sanctions will contribute to throwing Russia into a “mild recession” this year, Raiffeisen said. Therefore, the company is “proceeding cautiously and following a policy of selective underwriting” in the country. The share of group profit coming from Russia will decline but remain the largest.
The decline of currencies including the Russian ruble, Ukrainian hryvnia and Hungarian forint shrank the bank’s trading income compared with a year earlier. As the ruble recovered in the second quarter, it helped balance the capital hit caused by the further decline of the hryvnia.
The bank’s core equity Tier 1 capital ratio, a measure of financial strength, rise to 10.4 percent from 9.9 percent three months earlier according to the most stringent Basel rules. After it raised 2.8 billion euros selling stock this year to bolster its reserves ahead of the European Central Bank’s asset review, it’s confident to pass the test, Sevelda said.
Raiffeisen had cut its growth assumptions and increased its forecast for bad debt provisions in May because of the conflict in Russia and Ukraine. It reaffirmed the goals today.
To contact the reporter on this story: Boris Groendahl in Vienna at firstname.lastname@example.org