Raiffeisen Profit Drops as Asia Losses Compound Lower Income

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  • CET1 capital ratio rises to 12.2%, helped by RWA reductions
  • Decision on RZB merger expected in second half of September

Raiffeisen Bank International AG, the Austrian bank whose parent was among the worst performers in European stress tests, said profit halved in the second quarter, hurt by losses in Asia and a drop in interest income.

Net income slumped to 96 million euros ($109 million) from 192 million euros a year earlier, the Vienna-based lender said in a statement on Thursday. That’s below the 134 million-euro average estimate compiled by the company. Revenue declined 11 percent, hurt by a 14 percent drop in net-interest income. The company also took charges on its Asian portfolio that it’s winding down.

“Due to the ongoing low interest rate environment and the reduction of our loan volume, our income remains under pressure,” RBI Chief Executive Officer Karl Sevelda said in the statement. “The improvement of our capital base remains the top priority.”

RBI, the listed arm of a cooperative co-owned by about 1.7 million Austrians through 477 local credit unions, is seeking to shore up capital buffers by cutting assets and simplifying its structure. The effort gained urgency after European supervisors’ stress tests conducted last month found its parent to be the region’s third-worst capitalized lender, with only Banca Monte dei Paschi di Siena SpA and Allied Irish Banks Plc showing weaker results.

Capital Buffer

RBI’s own capital ratio rose more than expected and already reached the group’s goal for the end of next year. The common equity Tier 1 ratio stood at 12.2 percent of assets weighted for risk at the end of June, up 70 basis points and above its 12 percent target for 2017. The lender increased the ratio by reducing credit and market risk, while the absolute capital level remained little changed.

Raiffeisen’s shares swung between gains and losses, declining 2 percent to 11.53 euros at 10:38 a.m. in Vienna. They have dropped about 15 percent this year, giving the lender a market value of 3.4 billion euros, or 0.4 times its book value.

“It’s a decent, but somewhat messy result,” said Simon Nellis, an analyst at Citigroup Inc. in London. “The market is anyway less focused on financial performance, which is stabilizing, and more on the possible merger with its parent that is under consideration.”

RZB Merger

The biggest deal under consideration in Raiffeisen’s restructuring plan is a merger of RBI with its 61 percent-owner Raiffeisen Zentralbank Oesterreich AG. RZB’s multilayered ownership structure and widespread holdings are one of the main factors weighing on regulatory capital. RBI has also put its Polish business up for sale, while RZB is selling a stake in insurer Uniqa Insurance Group AG.

“The million-dollar question is whether the RZB merger comes, and under what conditions,” said Thomas Neuhold, a Vienna-based analyst at Kepler Cheuvreux with a hold recommendation on the shares. “The Poland sale as well should be resolved soon and before all of that happens, I don’t think the stock can outperform the sector.”

RBI said its board will decide next month whether to go ahead with the merger, with shareholder meetings due in early 2017 to approve a deal.

Analysts including Barclays Plc’s Kiri Vijayarajah have said the deal forces minority shareholders to pay for a capital gap at RZB. HSBC’s Johannes Thormann said in a note this week he’s currently subtracting 35 percent from his price target to account for uncertainty related to the future structure.

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