RBI last night released an ad hoc statement indicating a FY14 B3 CET1 ratio of c10%, a new 20% risk-weighted asset (RWA) reduction plan and reiterated confidence in its Russian subsidiary's profitability. Further details are to be given at the preliminary results announcement on 9 February. Management confidence on its capital ratios, even as supervisory responsibility migrates to
the European Central Bank (ECB), should provide some comfort against capital raise concerns as a 'base case', although are less relevant in the context of 'tail risk' concerns around its Russian exposure. We hesitate to take too much comfort from the RWA reduction plan without seeing details. Trading at 0.35x 2014E NAV and having substantially underperformed the market, any signs of management action are welcome, but it is too early to assess their probability of success with any confidence. Although optically inexpensive, earnings
visibility is poor and we remain concerned that macroeconomic headwinds, geopolitical tail risks, potentially tightening regulatory requirements and a complex corporate structure will weigh on the share price for the medium term.
Bull (1): Implicit positive CET1 surprise: RBI indicates its FL B3 CET1
ratio was "approximately 10%" as of 4Q14, somewhat better than imputed by the previous guidance of a -51bp 4Q14 forex impact, an implicit 4Q14 loss and a 10.2% B3 CET1 ratio as of 3Q14. More interestingly, as well as expressing compliance with existing capital requirements (set by the Austrian regulators), management also expressed confidence in meeting undisclosed prospective capital requirements from the ECB (while not finalised, management should by now have some visibility from draft requirements). This provides some tentative comfort
that the transition of supervisory responsibilities to the ECB should not, in itself, prompt a capital raise (management again repeated that no capital raise is planned). Details of majority owner RZB's capitalisation will not be released until 13 April.
Neutral (1): RWA reduction plan: a plan to cut RWA by 20% over the mid-term
was announced, but with details to follow on 9 February. We are wary of placing
too much confidence in this - both from the risk of lost profitability, the
execution risk around asset sales and what may be a delicate balance between
capital benefit or drag of divestment of subsidiaries given the often high
capital ratios of local legal entities.
Neutral (2): Russian guidance: RBI reiterated its Russian subsidiary's
profitability at "significantly over EUR 300m" (this was also pre-announced on 5
January) and expectation of "a positive result in Russia in 2015." We doubt that
the high historical or current profitability of the Russian subsidiary was in
doubt, rather we see concerns instead based around 'tail risks.'
