Banking: Raiffeisen merger raises more questions than answers

The saga of the Austrian Raiffeisen sector’s search for capital will continue this month when shareholders vote on whether to merge its international arm, RBI, with holding company RZB. The current proposal would relieve short-term regulatory pressures, but critics say it fails to address the structural weaknesses of the sector.

Karl Sevelda hand-600
Karl Sevelda, chief executive of RBI, makes little secret of the fact he will be glad
to bring his banking career to an end

On January 24, shareholders of Raiffeisen Bank International will vote on whether or not to merge the Austrian lender with its majority owner, Raiffeisen Zentralbank. 

In essence the transaction, first mooted six years ago, is a relatively simple one. It will combine RBI, a regional lender with assets of €114 billion and operations in 13 countries across central and eastern Europe, with a holding company that also owns a handful of much smaller businesses in Austria and beyond. 

Holders of the 39.2% of RBI that is publicly traded will receive around 35% of the combined bank, with the rest going to the current owners of RZB. If approved, the merger will be put through by the end of the first quarter.

The rationale for the deal is also fairly simple. The main driver is the urgent need to strengthen RZB’s capital base. In August, following the latest round of stress-testing by the European Central Bank, two of RZB’s largest shareholders revealed that its capital ratios were "close to the supervisory intervention trigger". 

Options for increasing the bank’s capital in a hurry are limited by its complex ownership structure. More than 90% of RZB is held by eight regional Raiffeisenlandesbanks, which in turn are owned by a national network of 474 small Raiffeisen banks. Even if it were possible to coordinate all these entities, few currently have capital to spare. 

One solution would be to sell off some of RZB’s other holdings – indeed, the group has announced plans to dispose of a 17.6% stake in Austria’s second-largest insurer, Uniqa. 

After the shock of 2014, the shareholders calmed down. I believe that they are now all again supporting the development of RBI 
 
- Karl Sevelda, RBI

While that sale will boost RZB’s common equity tier-1 ratio by a handy 60 basis points, such disposals are clearly only a short-term solution and do nothing to solve the basic problem of the bank’s inability to raise capital. By contrast, a merger with RBI will not only boost RZB’s capital ratios but also, thanks to the former’s public listing, give the whole group access to the capital markets. 

This will also benefit RBI, which has been limited in previous capital-raising exercises by RZB’s desire to maintain a majority holding. Karl Sevelda, chief executive of RBI, says the bank "would have loved" to raise more than the €2.7 billion taken on its last equity market outing in January 2014. 

Instead, RBI was forced to announce sweeping cuts across its international network to support its capital base after posting its first-ever loss in 2014. These included a 20% reduction in risk-weighted assets in Russia, its most profitable market, as well as the sale of three CEE subsidiaries (Poland, Slovenia and Czech-Slovak online bank Zuno) and exits from operations in Asia and the US.

This restructuring programme is still in progress – the sale of Raiffeisen Polbank is proving problematic – and had already boosted RBI’s fully loaded CET1 ratio to 12.2% by the end of June 2016, far above the 10.6% recorded by RZB. For a bank combining the two entities, the ratio at that date would have been 11.3%, according to material presented to RBI investors in October.

The group is aiming to raise that to at least 12% by the end of this year through a further reduction in RWAs and, potentially, the retention of RBI’s profits for 2016. Sevelda describes this target as "easily achievable". 

He says: "All our capital planning shows this shouldn’t be a problem."

The other main benefits expected from the merger, according to Sevelda, are the elimination of minority deductions and improvements to standards of transparency and governance. Becoming publicly listed will force RZB to embrace much higher standards of disclosure than it has previously adopted, while halving the number of boards will simplify decision-making. 

"At the moment, if we make a loan exceeding €100 million, which we frequently do, we need management and supervisory board approval at RBI and the same again at RZB," explains Sevelda. "This is very cumbersome."

Finally, the merger should soothe concerns about RBI’s relatively high non-performing loan ratio and exposure to emerging markets. While RBI has made good progress in reducing NPLs over the past two years, they still account for more than 10% of the portfolio, which, Sevelda says, "is something analysts and rating agencies don’t like". The combined bank will have an NPL ratio of 9.8%, based on June figures.

Similarly, most of the other assets contributed to the merged group by RZB, which will include its remaining 8.6% stake in Uniqa, as well asset management, building society and leasing subsidiaries, are focused on developed markets. Of the €24.4 billion exposure of these various businesses, jurisdictions outside Austria and western Europe account for just 14%.

What is more, Sevelda adds, all are stable, profitable – "although clearly not as profitable as Russia or most of our CEE countries" – and have almost no credit risk.

Mixed reviews

All of this makes the merger sound like a no-brainer. Indeed, the only wonder might be that it has not been put through sooner. Yet the proposal has received very mixed reviews, both from within and outside the Raiffeisen group.