Consolidation Looming at Raiffeisen Group

UNCLAS VIENNA 000210 SIPDIS, SENSITIVE TREASURY FOR OASIA/ICB/MAIER, NORTON, FTAT, OCC/SIEGEL TREASURY PASS TO FEDERAL RESERVE and SEC/E. JACOBS E.O. 12958: N/A TAGS: EFIN AU SUBJECT: Consolidation Looming at Raiffeisen Group REF: A) 09 VIENNA 828; B) 09 VIENNA 642 Sensitive but unclassified: Protect accordingly. ¶1. (SBU) SUMMARY: As markets await final 2009 results, consolidation rumors surround Raiffeisen International (RI) -- the second largest lender in eastern Europe and a listed subsidiary of RZB/Raiffeisen Zentralbank (Austria's third largest banking group). RI will likely report an 80% drop in profits, with loan losses more than doubling. Parent RZB may reintegrate Raiffeisen to cut costs and give the group better access to capital markets, essential to pay back state aid and meet higher equity requirements. Privately, Raiffeisen leadership say the move also offer an opportunity for cost-cutting. Investors panned the move, with RI's share price falling steeply. END SUMMARY. Background on Raiffeisen International (RI) - - - - - - - - - - - - - - - - - - - - - - ¶2. (U) A leading player in central/eastern Europe and the former Soviet Union (CEE/FSU),RI is a fully consolidated subsidiary of RZB -- i.e. on RZB's balance sheet. Since April 2005, RI has been listed on the Vienna Stock Exchange, with RZB holding 70% of RI, institutional investors 20% and private investors 10%. The RI network comprises 15 subsidiary banks and numerous finance and leasing companies with a combined 3,100 branches and outlets, 15 million customers and 59,000 employees in 17 markets (Albania, Belarus, Bosnia-Herzegovina, Bulgaria, Croatia, Czech Republic, Hungary, Kazakhstan, Kosovo, Moldova, Poland, Romania, Russia, Serbia, Slovakia, Slovenia and Ukraine). ¶3. (U) Raiffeisen International has no overall banking license; it is organized as an RZB holding company, with RZB holding the Austrian banking license. For this reason, RI could not receive equity from the GoA bank rescue package directly. In August 2009, RZB strengthened RI's capital base by giving it EUR 1.25 billion in fresh equity (EUR 600 million in non-voting participation rights and 650 million in hybrid Tier 1 capital) without changing RI's shareholder structure. RZB -- itself largely owned and controlled by a network of provincial Raiffeisen banks -- strengthened its own capital base by EUR 2.5 billion in 2009 (drawing EUR 1.75 billion from the GoA's state equity pot and raising EUR 750 million in participation capital from existing shareholders). RZB's Tier 1 capital ratio was 9.2% at the most recent reporting data (30 September 2009). Preliminary 2009 Results - - - - - - - - - - - - ¶4. (U) On February 22, Raiffeisen International (RI) disclosed that it was hard hit by the CESEE recession last year and expects a consolidated profit (after minority interest) of just c. EUR 212 million, down 78% from EUR 982 million in 2008. Loan loss provisioning more than doubled to EUR 1.74 billion (from EUR 780 million in 2008). Other preliminary results for 2009: net interest income EUR 2.9 billion (down 10% from 2008),net fee/commission income EUR 1.2 billion (down 18%),loans and advances to customers EUR 50.5 billion (down 9%),customer deposits EUR 42.6 billion (down 4%),balance sheet total EUR 76.3 billion (down 11%). Raiffeisen Group Prospects - - - - - - - - - - - - - - ¶5. (U) In response to a Reuters report, RZB acknowledged February 22 that it is looking for long-term solutions to RI's waning performance, including a possible re-integration of RI into RZB. RZB has reportedly hired McKinsey to study various options, but no decisions have been made. Markets responded very negatively to the news, with Raiffeisen International's falling by 12% the following day (its steepest one-day drop since March 2009). COMMENT - - - - ¶6. (SBU) RZB and the Raiffeisen Group are under pressure to raise capital to repay GoA funds and meet stricter equity standards, since a reported EUR 800 million of RZB's equity is in hybrid bonds that may not count as Tier 1 capital under proposed Basel 3 rules. RZB CEO Walter Rothensteiner told the Ambassador February 24 that reintegrating RI into RZB (disclosed prematurely due to media leaks) would give the group better access to capital markets, allowing for future repayment of capital to the Austrian government, but is also an opportunity to cut costs (i.e. reduce duplicative staffing) -- something analysts understand well, but a difficult topic to broach publicly. EACHO