Raiffeisen Bank: Russian exposure means the only options are bad ones

A fresh assault on the Russian banking system on Wednesday was poorly timed for Raiffeisen Bank, which boasts European lenders’ biggest exposure to the country. Any cheer from a positive first-quarter earnings update was soon wiped out by EU proposals to remove Russia’s Sberbank, among others, from the Swift system.

Shares ended the day down 5 per cent, despite Raiffeisen confirming its return on equity outlook range of between 8 and 10 per cent this year. That continues a downward slide that began when Russia invaded Ukraine in late February. Since then, its market value has more than halved, by about €4bn. Shares trade at less than 0.3 times tangible book, all-time lows. That value destruction reflects the bank’s dwindling options.

Raiffeisen, the Austrian owner of Russia’s tenth-largest bank, has €23bn of assets in Russia alone. Its executive team has several options on the table, one of which is a full withdrawal. But that would sever one of its most consistently profitable units. Operating profits there almost doubled in the quarter to €337mn, delivering a return on equity of 27 per cent from higher fees from foreign exchange transactions.

Letting go has been costly for others. Société Générale is taking a €3.1bn net hit from the disposal of its €15.4bn of its Russian exposure, including subsidiary Rosbank to Vladimir Potanin’s Interros Capital. Raiffeisen could at least lose its €2.3bn of equity in the local bank plus any net exposure on its loans there, worth potentially double that amount, thinks Lex.

That pain would take its toll on the bank’s core capital. Its common equity tier one capital ratio finished the quarter at 12.3 per cent, worth €12.8bn against its risk weighted assets. A multibillion euro write-off would significantly shrink that buffer. That in turn could mean raising more equity, something Raiffeisen has not had to do for five years.

This explains the deer-in-the-headlights approach from management to its Russian dilemma. That will keep the bank’s cheap shares from being a buy any time soon.