Raiffeisen Bank International Plans to Increase Capital, a Credit Positive
Last Wednesday, Austria’s Raiffeisen Bank International AG (RBI A2 negative, D+/ ba1 stable4) announced plans to increase its capital by €2.00-€2.25 billion during the first half of the year. The increase will allow RBI to pay back the €2.5 billion participation capital it raised during the financial crisis, €1.75 billion of which was from the Austrian government. In addition, the bank plans to issue additional subordinated capital to augment its capital base.
The capital increase is credit positive for RBI bondholders because it removes the backlog of costly participation capital that would have lost regulatory recognition in 2018. It will allow RBI to significantly improve the quality of its capital (see Exhibit 1).
However, RBI’s Tier 1 capitalization still trails that of its international peers (see Exhibit 2), although its relative low leverage is a mitigating factor. Given RBI’s strong and recurring earnings power, we expect it to continue to enlarge its capital base. Still, the bank needs to further streamline costs and lower its cost of risk to regain its full earnings power. RBI has been falling short of its 15% pre-tax return on equity target
mainly because of additional provisioning for its Central Eastern Europe franchise, where nonperforming loans now are 10.3% of its gross loans. A planned retrenchment from Hungary, Slovenia and Ukraine will also provide capital relief.
Implications for the Austrian Raiffeisen. The planned transaction only partially addresses the moderate capitalization of Raiffeisen Bankengruppe (RBG, unrated). At year-end 2012 RBG had a moderate Tier 1 capitalization of 9.1% for credit risk. Despite its stated intention to participate in the capital raise, we expect it to be diluted somewhat, but to maintain control over RBI (current ownership of 78.5%). Although the transaction will benefit RBG because fresh equity will replace the state capital, the overall measure will be little capital-accretive for either RBI or RBG. In our view, further strengthening of the sector’s capital base will be required, particularly at other levels of the group, the primary Raiffeisen banks (unrated) and the eight Raiffeisen regional banks Raiffeisenlandesbanken).6
Implications for Austria. During the financial crisis, Austria (Aaa negative) implemented a support package of up to €15 billion (approximately 5% of Austria’s current GDP) for financial institutions, of which €13.8 billion was drawn, including €6 billion of capital. The lion’s share of capital still outstanding refers to €1.75 billion of capital available to RBI. Its repayment would reduce the remaining government capital in the system to less than €1 billion, allowing the government to focus its efforts on the two banks that are still
subject to major restructuring, Hypo-AlpeAdria-Bank International AG (nationalized in 2009) and Oesterreichische Volksbanken AG (43.3% government stake).
)
