Raiffeisen International: Record result in 2008 despite the global financial crisis

 

• Consolidated profit rises by 16.7 per cent to 982 million euros

• Provisioning for impairment losses expanded to 780 million euros, up 119 per cent against 2007 level

• Increased efficiency improves cost/income ratio by 3.6 percentage points to 54.0 per cent

• Return on equity before taxes decreases by 3.7 percentage points to 22.0 per cent

• Earnings per share rise 10.2 per cent to 6.39 euros, proposed dividend: 0.93 euros per share

• Balance sheet total grows by 17.4 per cent to 85.4 billion euros

• Customer deposits increases by 9.3 per cent to 44.2 billion euros, loans and advances to customers rose by 18.5 per cent to 57.9 billion euros

• CIS region posts the highest regional contribution by delivering 40 per cent of the group’s profit before tax; Southeastern Europe: 33 per cent; Central Europe: 27 per cent

• Customer base grows by around1 million to 14.7 million

• Corporate Customers business division makes strong contribution to group’s profit before tax: 884 million euros (up 32 per cent)

• Retail Customers business division posts lower profits contribution (down 11 per cent to 435 million euros), due mainly to higher provisioning for impairment losses

• Consolidated profit for Q4/2008 stands at 120.5 million euros, down 44 per cent against the comparable period in 2007

• Focus on customer deposits and minimizing costs in 2009

All figures are based on International Financial Reporting Standards (IFRS).

Raiffeisen International Bank-Holding AG, a member of the RZB Group headed by Raiffeisen Zentralbank Österreich AG, posted a record profit in 2008, despite the global financial crisis. The consolidated profit (after tax and minorities) rose by 16.7 per cent to 982 million euros (2007: 841 million euros). The group’s profit before tax amounted to 1,429 million euros (2007: 1,238 million euros). Earnings per share increased to 6.39 euros from 5.80 euros in 2007. A profit distribution for 2008 of 0.93 euros per share, as in the previous year, will be proposed by the Managing Board to the Annual General Meeting. If the shareholders accept, the total dividend payout will amount to 143.8 million euros.

"Despite a noticeably deteriorated macroeconomic environment, we once again managed to post record results in 2008, an accomplishment that underlines the sustainability of our business model," said Raiffeisen International’s CEO Herbert Stepic. "Although developments were generally favorable for us, in the past year we were quick to react to the cyclical downturn in the region." In addition to applying increasingly more stringent risk criteria, Raiffeisen International sharply curtailed foreign currency lending and instituted a group-wide halt to further branch expansion and to the hiring of new employees. Staff reductions became necessary in Ukraine; the group saw itself forced to take similar personnel measures in Hungary at the start of 2009. Moreover, there will be a staff reduction in Slovakia due to the optimization of processes. "The measures aimed at raising our efficiency and expanding our capabilities that we have already implemented and those we will introduce make us confident that we are in sufficiently fit shape to kick off the year 2009 and to weather the crisis," Stepic added.

Profit from operating activities rose 40 per cent due to interest result

Despite an unfavorable market environment worldwide, Raiffeisen International achieved its best result ever in 2008. Profit from operating activities for the full year increased by almost 40 per cent to 2,247 million euros.

As in the preceding years, the driver of growth was net interest income, which rose by one-third to 3,232 million euros. Both business divisions contributed to that with corporate customers up by 39 per cent, and retail customers by 28 per cent. The regional emphasis was in the CIS, which registered the largest increase at over 40 per cent. That raised the Group’s interest margin again by 13 basis points on an annual basis to 3.99 per cent. The share of net interest income in operating income was 2 percentage points above the preceding year’s level and amounted to 66 per cent.

Net fee and commission income grew by almost 20 per cent, or 247 million euros, to 1,496 million euros, which represents a 31 per cent share of operating income.

General administrative expenses grew in the year under review by 21 per cent, or 449 million euros, to 2,633 million euros. General administrative expenses increased by 21 per cent in the past year, significantly less than operating income did at 29 per cent. That had a positive effect on the cost/income ratio, a key measure of bank efficiency that sets operating expenses in relation to operating income. It improved by 3.6 percentage points from 57.6 to 54.0 per cent.

Provisioning for impairment losses more than doubled in 2008

Against the background of the global financial and economic crisis, from which the CEE countries are not being spared, allocations to provisioning for impairment losses had to be raised substantially in 2008, and especially in the fourth quarter. Provisions were raised by 119 per cent, or 423 million euros, to 780 million euros, and their increase was far above growth of business volume. The risk/earnings ratio therefore climbed significantly from 14.8 to 24.1 per cent.

"The significant increase in our provisioning for impairment losses reflects the clear cyclical downturn in the fourth quarter on the one hand, and is the result of our traditionally conservative approach to loan loss provisioning on the other," said Raiffeisen International CFO Martin Grüll.

Just under two-thirds of provisioning for impairment losses (507 million euros) was allocated for retail customers, and the rest was mostly due to corporate customers (269 million euros). The regional emphasis of new provisioning for impairment losses was in the CIS with a share of 46 per cent, or 356 million euros, which yields a risk/earnings ratio of 28 per cent for the region. Central Europe also showed an increased need of provisioning, and new allocations there of 265 million euros resulted in a risk/earnings ratio of 26 per cent. At 159 million euros, new allocations in Southeastern Europe grew significantly from the preceding year’s very low level, but the risk/earnings ratio was the Group’s lowest at 17 per cent.

Focus on customer deposits

In the past year, Raiffeisen International placed a particular focus on developing customer deposits, which stood at 44.2 billion euros at the end of 2008, representing a year-on-year rise of 9.3 per cent (2007: 40.5 billion euros). "I regard the fact that we were able to achieve a noticeable rise in our volume of customer deposits – despite the general sense of uncertainty in the market and the corresponding withdrawal of customers deposits this past autumn -- as one of our most important achievements in the past year. This positive development reflects the high degree of trust that customers extend to the Raiffeisen brand and to our group’s long-term strategy," Stepic explained.

In 2008, the volume of loans and advances to customers increased by 18,5 per cent to 57,9 billion euros (2007: 48,9 billion euros). Raiffeisen International’s balance sheet total stood at 85.4 billion euros at the end of 2008, an increase of 17.4 per cent over the 72.7 billion euros the bank had reported a year earlier.

Core capital ratio above 8 per cent despite currency devaluations

Raiffeisen International’s balance sheet equity including consolidated profit and minority interests amounted to 6,518 million euros at the end of the year. Despite consolidated profit including minority interests of 1,078 million euros, equity remained below the preceding year’s level by 2 per cent, mainly due to currency devaluations.

The return on equity (ROE) before tax fell from 25.7 to 22.0 per cent. That was primarily due to the underlying average equity, which was 35 per cent above the preceding year’s level at 6,483 million euros in 2008 because of profit retention and the capital increase carried out in the fourth quarter of 2007, which brought in 1,220 million euros.

Influenced in particular by the negative effect of currency translation, own funds only rose by 5 per cent to 6,991 million euros. The core capital ratio based on total risk therefore fell by 2.4 percentage points to 8.1 per cent, and the own funds ratio fell by 2.7 percentage points to 9.7 per cent.

Customer base grew by around 1 million due to diversified network

In the retail customer segment, Raiffeisen International was serving almost 14.7 million private individuals and small enterprises at the end of the reporting period through business outlets, ATMs, and internet and phone banking. Customers had at their disposal the 3,231 branches of the largest banking network in Central and Eastern Europe, almost 6,600 ATMs, and more than 60 mortgage centers for their daily banking and financial transactions. More than 20,000 advisers helped customers with all questions related to checking and savings accounts, payment transfers, real estate financing, consumer loans, and credit cards. Moreover, Raiffeisen International offered its customers the possibility of financing with more than 1,500 automobile dealers and 2,150 retailers.

"Raiffeisen International is well-positioned in the CEE region, thanks to its presence in 17 markets. On this basis, our portfolio exhibits a good mix of risks, both on a geographical basis and with regard to our business structure – we cover the full range of customer groups by servicing large customers, small and medium-sized enterprises, and private individuals. Almost 60 per cent of our refinancing needs are met locally, namely through the deposits of our customers," Grüll said.

Q4 results clearly below those of comparable period in 2007, due mainly to provisioning for impairment losses

During the fourth quarter of 2008, the global financial crisis first began to leave its marks on the markets in which Raiffeisen International is active. Accordingly, the group’s net interest income (after provisioning for impairment losses) of 475.6 million euros was down 20.8 per cent in comparison to the same quarter a year earlier. The reason for this development lies in the allocations to provisioning for impairment losses, which stood at 414.8 million euros or around 300 million euros higher than during the comparable quarter of 2007. The group’s net commission income amounted to 398.6 million euros, an increase of 12.3 per cent over the same quarter in 2007. Furthermore, against the background of the Ukrainian currency’s devaluation against the US$, the hedge for capital investments in Ukraine became partly ineffective and was therefore recognized in the income statement in October. A resulting charge of 88 million euros was made to earnings. Not least due to this position, the group’s consolidated profit (after tax and minorities) declined to 120.5 million euros, a drop of 44 per cent in comparison to the same period of 2007.

Segment report:

Central Europe
In the year under review, earnings in the region of Central Europe remained slightly below the preceding year’s. Profit before tax fell on the comparable period by 2 per cent, or 11 million euros, to 442 million euros. The return on equity before tax for Central Europe fell by 5.7 percentage points to 16.9 per cent. The main factors responsible for this decline were a 30 per cent increase of average equity on the comparable period, significantly higher provisioning for impairment losses in the region, and earnings-enhancing special effects in the preceding year.

Net interest income increased by 25 per cent in 2008 to 1,025 million euros. The Group’s assets in Central Europe grew by 25 per cent. The net interest margin improved by 2 basis points on the comparable period and amounted to 3.14 per cent. At 13 per cent, growth of risk-weighted assets from 20.8 billion euros before to 23.5 billion euros was significantly weaker than that of balance sheet assets. Their increase was based mainly on organic growth, but that was counteracted by the introduction of Basel II, which reduced the risk-weighted assets.

New allocations to provisioning for impairment losses rose by 117 per cent to 265 million euros. That was mainly due to new allocations to individual provisions in Hungary and Poland, while portfolio-related provisions in the region remained at the preceding year’s level. The risk/earnings ratio increased by 11.0 percentage points on the comparable period to 25.9 per cent. The share of the loan portfolio attributable to non-performing loans rose by 48 basis points on the comparable period to 3.12 per cent.

The region’s net fee and commission income grew by 21 per cent, or 98 million euros, to 568 million euros. Foreign currency and precious-metals business and notes/coins business played a large part in that at 257 million euros, as did payment transfers and account services at 201 million euros. Loan and guarantee business contributed another 55 million euros. The Group units in the Czech Republic and in Poland registered the largest increases in net fee and commission income. The share of operating income due to business affecting commission income was the highest of all segments in Central Europe at 35 per cent.

Net trading income in the region of Central Europe came to 56 million euros and therefore remained at the comparable period’s level. A positive result of 85 million euros was achieved there from currency-related business. On the other hand, the region registered a loss of 27 million euros in interest-related business, which was mainly caused by valuation losses on securities – primarily sovereigns – and derivative financial instruments.

Southeastern Europe
In the region of Southeastern Europe, profit before tax amounted to 534 million euros and was therefore significantly above the preceding year’s comparable value of 476 million euros. Profit grew by 12 per cent, mainly thanks to the strong increase of net interest income and net fee and commission income. The region registered the second-highest earnings of all segments. Because of a significantly higher equity base, the return on equity before tax fell by 4.5 percentage points to 25.8 per cent.

Net interest income in the region increased by 29 per cent, or 215 million euros, to 947 million euros, while balance sheet assets rose by 12 per cent to 25.2 billion euros. That was achieved by means of an improved net interest margin, which went up 22 basis points to 3.96 per cent. Risk-weighted assets increased by 16 per cent from 16.3 billion euros to 18.9 billion euros. The Basel II effect was somewhat stronger because countries with lower ratings are included in this region.

Allocations to provisioning for impairment losses rose from a very low level by 171 per cent, or 100 million euros, to 159 million euros. This increase was primarily due to new allocations to portfolio-related provisions in nearly all of the region’s Group units. Individual provisions grew mainly as a result of allocations in the Group’s Serbian unit. The risk/earnings ratio therefore rose to 16.8 per cent (plus 8.8 percentage points). The share of the loan portfolio attributable to non-performing loans increased on an annual basis by 68 basis points to 2.26 per cent.

Net fee and commission income rose by 20 per cent from 385 million euros to 463 million euros. Payment transfers contributed 175 million euros to that, and foreign currency and precious-metals business 102 million euros. Loan administration and guarantee business rendered another 91 million euros. The region’s largest increases were booked by the unit strongest in commissions, Raiffeisen Bank in Romania (plus 52 million euros).

Net trading income also registered positive development in the region of Southeastern Europe. Altogether, it increased by 20 per cent to 57 million euros. At 80 million euros, currency-related business was significantly above the comparable period’s value (26 million euros). Due to market influences, a loss of 12 million euros was booked in interest-related business, and losses of 11 million euros in stock-related business, especially due to positions in Croatia and Bosnia and Herzegovina.

Commonwealth of Independent States (CIS)
Profit before tax of this segment grew in the period under review by 50 per cent, or 223 million euros, to 665 million euros. The increase of earnings in the region was significantly greater than in the rest of the Group. It resulted mainly from very high growth of net interest income and trading profit. The return on equity before tax rose accordingly by 4.0 percentage points to 33.9 per cent.

With a plus of 41 per cent, or 375 million euros, to 1,297 million euros, development of the region’s net interest income was significantly more dynamic than that of balance sheet assets, which increased by 18 per cent, or 3.4 billion euros, to 22.9 billion euros. An important reason for that was a significantly improved net interest margin, which rose by 64 basis points to 6.10 per cent.

Risk-weighted assets increased in line with balance sheet assets by 18 per cent to 18.1 billion euros. That development was shaped by opposing influences. Growing retail business benefited from the more favorable Basel II calculation, since the preceding year’s comparable values had still been based on the Basel I calculation. On the other hand, expansion of business with corporates led to a comparatively stronger increase in risk-weighted assets.

The allocation to provisioning for impairment losses doubled from 176 million euros in the comparable period to 356 million euros in the year under review. This increase was mainly due to extensive portfolio-related provisions, formed in connection with loans to private individuals in Ukraine. The reason for that was the sharp currency decline, which has led to higher debt service payments for customers. On the other hand, the increase of individual provisions came to only 37 per cent and was mostly a consequence of retail customers. The risk/earnings ratio rose by 8.4 percentage points to 27.5 per cent. The share of the loan portfolio attributable to non-performing loans increased by 186 basis points and reached 3.61 per cent.

Net fee and commission income registered growth in 2008 of 64 million euros to 457 million euros. Payment transfer business was the most important source at 261 million euros. Foreign currency and precious-metals business contributed 146 million euros.

Net trading income grew from 47 million euros to 161 million euros. Currency-related business gave rise here to income of 199 million euros. Most of that (145 million euros) derived from hedging transactions in the Group’s Russian unit aimed at minimizing the currency risk of certain loan portfolios. On the other hand, interest-related business brought a loss of 50 million euros, which was mainly based on valuation losses on securities of corporates in Russia.

Raiffeisen International adopted IFRS 8 early, and it has been applied for the year 2008. Only the segmental reporting regulations laid out in IFRS 8 have been applied to this report. According to the IFRS 8 regulations, reporting is to be made according to only one segment criterion. As of 31 December 2008, the following segments existed: Central Europe, Southeastern Europe, Russia and CIS other. The location of the respective business outlets served as the criterion for segment assignment.

Business divisions

As well as the regional segmentation Raiffeisen International is structured into business divisions which reflect the internal organization and reporting structure. Business is divided into the following divisions:

• Corporate customers
• Retail customers
• Treasury
• Participations and other

Corporate Customers
For the corporate customer division, the past year was shaped by two opposing business developments. On the one hand, the division registered profit before tax of 884 million euros, its best result in Raiffeisen International’s history, and once again proved to be a foundational core business of the Group. On the other hand, the final months of 2008 were already characterized by the effects of the financial crisis.

The corporate customers division registered strong earnings growth in the year under review. Profit before tax increased by 32 per cent on the comparable period to 884 million euros. Operating business developed positively in all respects. Net interest income rose by 39 per cent to 1,113 million euros, and net fee and commission income registered a significant plus of 26 per cent to 531million euros. Altogether, the division’s operating income rose by 34 per cent from 1,250 million euros to 1,678 million euros. Provisioning for impairment losses doubled to 269 million euros.

General administrative expenses grew by a moderate 18 per cent to 526 million euros, which further improved the cost/income ratio to 31.3 per cent. Other net operating income rose by 25 per cent to 33 million euros, to which operating leasing contributed the most at 28 million euros. Risk-weighted assets for credit risk according to Basel II amounted to 31.1 billion euros, which means an increase of 26 per cent on the preceding year’s comparable value, still calculated according to Basel I. In addition to business expansion, the new method of calculation, which in particular burdens loans and advances to banks and to the public sector with higher risk weightings, was also responsible for this.

Despite high profit, the return on equity before tax declined by 3.8 percentage points to 26.4 per cent due to a sharply increased equity base. This division’s share of total earnings rose by 8 percentage points to 62 per cent.

Retail Customers
Profit before tax in the retail customers division fell by 11 per cent on the comparable period to 435 million euros. A 133 per cent increase of new allocations to provisioning for impairment losses (507 million euros) and a rise of general administrative expenses by 22 per cent to 1,876 million euros due to continuing investments in the branch network were mainly responsible for this decline.

Operating income from the retail customers division grew by 25 per cent to 2,819 million euros. The greatest increase was achieved in net interest income with a plus of 28 per cent to 1,844 million euros. Net fee and commission income rose by 20 per cent and reached 962 million euros. Despite continued high general administrative expenses, the cost/income ratio fell by 1.7 percentage points to 66.6 per cent. Risk-weighted assets amounted to 19.1 billion euros at the end of the period under review and therefore remained at the preceding year’s level. Despite organic growth, the Basel II rules led to a lower weighting of total lendings to retail customers compared with the preceding year’s value calculated according to Basel I.

The return on equity before tax fell sharply by 7.2 percentage points to 22.3 per cent due to strong growth of the equity base in the past year and the decline in profit. The division’s share of total earnings dropped by 9 percentage points to 30 per cent.

Raiffeisen International’s focus increasingly shifted last year to attracting customer deposits. Numerous marketing campaigns were initiated for this purpose and led in the fourth quarter to a strong inflow of customer deposits, which thus returned to the level before the financial crisis escalated. In December, the retail customer segment registered the highest monthly inflows of customer deposits to date. The intensive marketing activities and efforts in this direction are to continue in 2009.

Treasury
The treasury division achieved profit before tax of 166 million euros (minus 12 per cent). The positive earnings contribution was achieved despite a loss from financial investments and current financial assets thanks mainly to a 31 per cent increase of trading profit. That rose despite a special effect that yielded a loss of 88 million euros due to the release of a capital hedge primarily because of high valuation gains from foreign currency derivatives. The loss from financial investments amounted to 48 million euros and was explained by the devaluation of securities following the financial crisis.

General administrative expenses rose by 30 per cent in the year under review. The cost/income ratio also went up 3.7 percentage points to 31.3 per cent. The own funds requirement and risk-weighted assets increased sharply due to the initial application of Basel II rules, which link investments in sovereigns and banks to the corresponding rating. The preferential weightings according to Basel I may no longer be applied.

The division’s return on equity before tax fell by 7.3 percentage points to 25.6 per cent due to the fall in profit and rise of the own funds requirement and of equity calculated on that basis.

Participations & Other
Profit before tax in the participations and other division improved by 47 per cent on the comparable period to minus 56 million euros. The result is negative mainly because in addition to net income from participations and non-banking activities, the division includes the costs of central group management. Those remain in the division and are not distributed to the other business areas.

The division also includes the computational results from the investment of equity, which rose sharply in the period under review due to the high interest rate level in the CEE region.

Outlook for 2009
Against the background of the current financial and economic crisis, concerns have arisen in recent months about the economic stability and credit rating of some of the countries in the CEE region, as well as the financial institutions operating there. Due to the considerable currency fluctuations of some currencies against the euro, these concerns further deepened and have had a considerable impact on Raiffeisen International's business operations. Nevertheless, the countries of Central and Eastern Europe offer financial institutions interesting perspectives and attractive long-term business opportunities, which result from their catch-up potential with the countries of Western Europe. Raiffeisen International continues to be convinced of this potential, and continues to regard the CEE region as its core market. As in the past, not all markets will develop at the same pace, and Raiffeisen International therefore considers its presence in 17 markets in CEE, where it has a large network of branch offices, to be a strength.

Raiffeisen International expects business with corporate customers to make the largest contribution to profit before tax again in 2009. This year the Group plans to continue its business model, which is based on integrated service and advisory solutions for its main bank customers, in the corporate customer division. Non-interest-bearing business, e.g. the further expansion of the Group's leading position in cash management, will be one emphasis of its activities.

In the retail customer division, Raiffeisen International will continue to take advantage of its large branch network. Despite the difficult market conditions, Raiffeisen International plans to further develop its product portfolio and segment specific value propositions particularly with respect to insurance, fee based liability products and affluent banking. Raiffeisen International also plans to increase investment in customer relationship management technology in order to increase product penetration for all its key customer groups.

After a strong growth in lending to customers over the last several years, Raiffeisen International's focus this year will be on enhancing its active credit portfolio and risk management. Raiffeisen International expects lending to customers in 2009 to be at the same level as the year before. In view of the unfavorable overall conditions for other forms of refinancing, the focus has shifted increasingly in the direction of customer deposits. Against this background, the company will continue its efforts to gain customer deposits during the 2009 business year.

Moreover, the management took a number of measures for the year 2009 that will moderate the increase in costs that was the result of the Group's growth in recent years. Administrative expenses should therefore be at the level of the previous year. The number of branch offices will ultimately remain at the same level as in the business year 2008. In this context improvements in profitability will be given increasing attention.