The international banking world was completely dominated in the third quarter by the global financial crisis, which has put many financial institutions in jeopardy. Despite this crisis, whose effects Raiffeisen International also felt indirectly, its results remained at a record level: Consolidated profit (after tax and minorities) for the first nine months of 2008 rose by 37.7 per cent to 861.5 million euros (1-9 2007: 625.7 million euros). Profit before tax went up by 32.3 per cent to 1,261.0 million euros (1-9 2007: 965.4 million euros), while profit after tax grew by 31.1 per cent to 965.4 million euros (1-9 2007: 736.6 million euros). At the end of the third quarter in 2008, the return on equity before taxes amounted to 25.4 per cent despite major additions to equity and thus almost remained at its year-end level of 2007 (25.7 per cent). All figures are based on International Financial Reporting Standards (IFRS). The adapted IFRS guidelines regarding reclassification of securities held for trading into securities held to maturity were adopted by the IASB and the EU in the third quarter, but were only partly applied in the Group. The total amount involved was 258 million euros and had a positive effect of 3.3 million euros in the income statement. The share of balance sheet assets attributable to financial investments came to 8 per cent (minus 1 percentage point).
«Our performance in what has partly been a very difficult environment proves that our business model allows us to succeed even in the face of strong economic headwinds», said Raiffeisen International CEO Herbert Stepic.
«What is particularly pleasing is that our third-quarter consolidated profit is only slightly below the record level we posted for the preceding quarter — despite a significantly higher level of loan loss provisions», CFO Martin Grull added. Balance sheet total grows to 87.3 billion euros at the end of the third quarter
Based solely on organic growth, Raiffeisen International managed to raise its balance sheet total to 87.3 billion euros, an increase of 14.5 billion euros — or nearly 20 per cent — since the beginning of the year. At a plus of 3 per cent, or 2.4 billion euros, exchange rate movements had a significant influence on the balance sheet total due to the considerably stronger currencies in almost all CEE countries. On the other hand, changes in the scope of consolidation had no noteworthy effects on the consolidated balance sheet, so adjusted organic growth amounted to 17 per cent, or 12.1 billion euros.
Loans and advances to customers rose by 25 per cent from the beginning of the year to 61.1 billion euros. Adjusted for impairment loss provisioning of 1.4 billion euros, lendings to customers accounted for 69 per cent of the balance sheet total. Credits to retail customers rose slightly stronger at 29 per cent than credits to corporate customers did at 24 per cent. Smaller increases were shown for loans and advances to banks at plus 1.1 billion euros, and for financial investments at plus 0.6 billion euros. Deposits from banks were up by 32 per cent, or 6.4 billion euros, to 26.3 billion euros. Deposits from customers, which increased by 13 per cent to 45.6 billion euros, were also a substantial source of funding. Liabilities evidenced by paper in the form of securities rose by 51 per cent to 3.5 billion euros, of which 0.8 billion euros stemmed from several own securitization and warehousing transactions.
Dynamic growth in net interest income
Raiffeisen International's operating results continued to develop very positively during the first three quarters of the current year. The most important income component at the end of the first nine months was net interest income, which rose by 37 per cent versus the comparable period last year from 1,704 million euros to 2,342 euros million. Its growth was thus substantially above that of the average balance sheet total by 31 per cent. There were no material effects from changes in the scope of consolidation in the reporting period. The largest increase was in the treasury segment, with a plus of 87 per cent to 160 million euros. The corporate customer segment registered an increase of 39 per cent to 793 million euros, which was near the Group average. Net interest income in the retail customer segment grew by 32 per cent versus the comparable period in 2007 to 1,355 million euros. There were significant increases of net interest income in all regional segments. The CIS had the largest plus, which amounted to 44 per cent. That was mainly due to significantly higher interest margins compared with the other regions. Net interest income rose by 36 per cent in Southeastern Europe, and by 32 per cent in Central Europe. The Group's net interest margin improved by 17 basis points versus the comparable period in 2007 to 3.96 per cent. It was also 10 basis points above the 2007 level, despite higher funding costs due to the global financial crisis.
Growth rates for net commission income, which rose by 23 per cent to 1,098 million euros, were also gratifying, though somewhat lower than in the case of net interest income. The strongest increases were in loan and guarantee business, where income rose by 45 per cent to 152 million euros, and in foreign exchange business, which at 348 million euros contributed 35 per cent more to the total result. Payment transfers remained the most important earnings component, on which a result of 475 million euros was achieved, representing an increase of 24 per cent.
Despite the adverse market environment, trading profit was 6 per cent above the comparable period last year. A look at the individual earnings components reveals an extremely mixed picture. Strong increases were registered by result from currency-based business, which almost doubled from 87 million euros last year to 156 million euros. Net income from interest-related business fell from 21 million euros to minus 22 million euros, caused in particular by price declines in the last two months of the quarter.
Other operating income amounted to minus 18 million euros, while a positive result of 18 million euros had still been achieved last year. This decline is spread across several items. Last year, initial consolidation effects that were 10 million euros higher had been included due to the release of negative goodwill through the income statement. Furthermore, expenses arising from new allocations to other provisions, particularly for litigation, increased by 10 million euros. Finally, expenses for other non-income-related taxes also rose by 11 million euros. On the other hand, the earnings contribution from operating leasing, primarily in Southeastern Europe, developed positively, up by 12 million euros to 28 million euros.
General administrative expenses rise moderately
General administrative expenses rose by 402 million euros, or 26 per cent, versus the comparable period last year to 1,940 million euros. There were no notable effects due to changes in the scope of consolidation. In the first nine months of the year, general administrative expenses rose less than operating income did despite a continuation of the investment program designed to expand distribution channels. The cost/income ratio improved accordingly by 3.0 percentage points versus last year to 54.6 per cent.
Staff expenses made up the largest share of general administrative expenses at 49 per cent. They rose by 25 per cent, or 188 million euros, versus the comparable period last year to 947 million euros. Wages and salaries accounted for 78 per cent of staff expenses, statutory social security costs for 19 per cent, and voluntary staff expenses for 3 per cent.
Viewed regionally, there were only small differences among the rates of increase in staff expenses. They rose by 27 per cent in Central Europe, by 25 per cent in Southeastern Europe, and by 22 per cent in the CIS.
The average number of staff amounted to 61,140 in the period January to September 2008. That meant an increase of 12 per cent, or 6,461, versus the comparable period last year. Southeastern Europe registered the largest plus at 23 per cent, or 3,312. In Central Europe, the average number of staff grew by 14 per cent, or 1,612, while the figure in the CIS was above that of the year-earlier period by 6 per cent, or 1,538.
Other administrative expenses registered a higher increase than that of staff expenses. They grew by 32 per cent, or 195 million euros, to 811 million euros. At 39 per cent, the strongest rise of other administrative expenses occurred in the CIS and was due to higher rental expenses. Central Europe and Southeastern Europe showed pluses of 24 per cent and 20 per cent, respectively. The largest expense items were office space at 223 million euros (plus 39 per cent), information technology at 103 million euros (plus 25 per cent), and advertising at 88 million euros (plus 17 per cent).
The number of business outlets came to 3,168 at the end of the quarter. That represents a net addition of 145 outlets versus the comparable period. New outlets were opened mainly in Southeastern Europe (238), including particularly in Romania (146) and Bulgaria (49). In the CIS, 112 branches were closed on balance due to further site optimization efforts.
Consistent and focused risk policy — Provisioning for impairment losses raised by 51 per cent
New allocations to provisioning for impairment losses rose by 51 per cent, or 123 million euros, compared with last year to 366 million euros. Viewed regionally, Group units in the CIS accounted for 38 per cent, or 140 million euros, of provisioning for impairment losses, and Group units in Central Europe for 37 per cent, or 136 million euros. While provisioning in the CIS remained nearly unchanged versus the comparable period last year, Central Europe saw an increase of 67 million euros. The largest pluses were in Hungary because of worsening economic development and in the Czech Republic due to specific cases in the corporate segment. In Southeastern Europe, provisioning for impairment losses amounted to 90 million euros. The increase of 56 million euros versus last year's low level occurred mainly at Group units in Romania, Croatia, Bulgaria, and Albania.
The Group's risk/earnings ratio amounted to 15.6 per cent. Retail customers accounted for
73 per cent of all provisions formed, and corporate customers for the rest. In the third quarter, the ratio increased to 19 per cent, which was above the level in the previous quarters.
Solid capital base — Equity raised by 15 per cent
Equity shown on Raiffeisen International's balance sheet increased by 15 per cent, or 965 million euros, from the end of 2007 to 7,587 million euros. On the one hand, it rose due to the current year's profit of 965 million euros and to capital contributions from minority shareholders to various Group units in the amount of 41 million euros. Set against that, on the other hand, was a profit distribution of 179 million euros for the year 2007. In June 2008, the Annual General Meeting of Raiffeisen International approved a dividend payout of 0.93 euros per share, which makes a total of 143 million euros. Other profit distributions in the amount of 37 million euros went to minority shareholders of Group units.
Furthermore, positive changes in the exchange rates of some CEE currencies, minus associated capital hedges, caused equity to increase on balance by 159 million euros. The greatest effects came from the currency revaluations in Ukraine and in Slovakia, Hungary, and Poland.
Regulatory own funds increased by 5 per cent, or 360 million euros, to 7,044 million euros. That does not include the current profit of the reporting year, because it may not be taken into account yet in the calculation under applicable Austrian regulations.
Core capital (Tier 1) increased by 88 million euros to 5,780 million euros. Material changes in core capital resulted, on the one hand, from the significant revaluation of various CEE currencies and, on the other hand, from Raiffeisen International's dividend payout in the amount of 143 million euros. Additional own funds (Tier 2) rose by 237 million euros to 1,194 million euros primarily because of the changed method of calculation since the launch of Basel II. Eligible short-term subordinated capital (Tier 3) increased by 43 million euros to 101 million euros.
Set against own funds is a regulatory own funds requirement of 6,080 million euros. That results in excess cover of about 16 per cent, or 964 million euros. The own funds requirement had amounted to 4,317 million euros at the end of 2007 under the old regulation (Basel I). The additional own funds requirement of 1,762 million euros is therefore partly due to the Basel II effect, and especially to the newly included own funds requirement for operational risk, which amounts to 440 million euros.
The ratio of core capital to credit risk fell in comparison with the end of the year by 2.5 percentage points to 8.9 per cent (that would be 10.4 per cent including current-year profit). The ratio to total risk amounted to 7.6 per cent, which would be 8.9 per cent including profit. The own funds ratio decreased by 3.1 percentage points to 9.3 per cent, which would be 10.5 per cent including profit.
Very good third-quarter results despite the financial crisis
Raiffeisen International again achieved very good results in the third quarter of 2008 despite the global financial crisis. Compared with the second quarter, profit from operating activities rose in the third quarter by 9 per cent to 578 million euros. Due to a higher need of provisioning for impairment losses, quarterly consolidated profit came to 296 million euros and was thus 5 per cent below that of the preceding quarter, during which Raiffeisen International posted the highest quarterly profit in its corporate history.
The business activities of Raiffeisen International are divided into business and regional segments.
Business segments — Corporate customer segment posts 35 per cent profit growth
The corporate customer segment registered a strong earnings increase after nine months. Profit before tax grew by 35 per cent versus the comparable period to 698 million euros. That was based largely on operating business. Increases in net interest income by 39 per cent to 793 million euros and in net commission income by 25 per cent to 385 million euros had a positive impact. Provisioning for impairment losses rose by 37 per cent to 99 million euros. General administrative expenses grew by 31 per cent to 408 million euros, resulting in a further improved cost/income ratio of 33.8 per cent. Other operating profit amounted to 25 million euros, of which about 13 million euros came from the operating leasing business. The risk-weighted assets for determining credit risk according to Basel II amounted to
35.4 billion euros, which means an increase by 59 per cent versus the comparable period last year calculated according to Basel I. That is connected with the new method of calculation, which burdens loans and advances to banks and the public sector with higher risk weightings. Despite the high profit, the return on equity fell by 3.6 percentage points to 29.3 per cent due to the sharply increased equity base. The share of total earnings attributable to this business segment rose by 1 percentage point to 55 per cent.
The retail customers segment's contribution to the Group's profit before tax stood at 35 per cent, a decline of 2 percentage points on the comparable period. Profit before tax in the retail customer segment improved by 24 per cent versus the comparable period to 438 million euros. A 28 per cent rise of general administrative expenses to 1,378 million euros due to ongoing investments in the branch network and 55 per cent higher new allocations to impairment loss provisioning (265 million euros) were mainly responsible for this comparatively moderate increase. Despite continued high general administrative expenses, the cost/income ratio was reduced by 1 percentage point to 66.2 per cent. Compared to the first three quarters of 2007, the return on equity (ROE) declined by 1.6 percentage points to 28.9 per cent.
The treasury segment made a considerable earnings contribution of 197 million euros (plus 59 per cent). That was achieved, despite 31 per cent higher general administrative expenses, largely through improvement of net interest income by 87 per cent. The own funds requirement and risk-weighted assets (credit risk) rose sharply due to the changed Basel II rules, as investments in sovereigns and banks under Basel II are dependent on the rating and the preferred weightings of the old rules can no longer be applied. The segment's return on equity fell by 4.4 percentage points to 25.6 per cent as a result of the increased own funds requirement and the equity calculated on that basis. The cost/income ratio improved slightly to 26.7 per cent.
Regional segments — CIS again posts highest quarterly results
After nine months, the CIS again registered the highest profit before tax of all three segments at 477 million euros. The strong earnings growth of 84 per cent, or 218 million euros, is primarily attributable to high interest income and a better risk/earnings ratio. Balance sheet assets increased by 36 per cent compared with last year. The CIS contributed 38 per cent of total profit before tax and was thus 11 percentage points above its share in the comparable period last year.
Southeastern Europe made the second-largest profit before tax, which amounted to 430 million euros. The earnings increase of 23 per cent, or 82 million euros, was mainly based on solid growth of net interest and commission income and a continuing lean cost structure. The contribution to profit before tax amounted to 34 per cent, which is a slight decline of 3 percentage points versus the year-earlier level. Balance sheet assets grew by 22 per cent compared with last year.
In Central Europe, profit before tax improved by 2 per cent, or 7 million euros, to 354 million euros. The result was positively influenced by increases of net interest and commission income and negatively influenced by high allocations to provisions. The segment contributed 28 per cent to total earnings. Due to the sharp rise in the CIS, that represents a decline of 8 percentage points versus last year's figure, which was influenced by special effects, resulting from changes in the scope of consolidation. Balance sheet assets rose by 30 per cent compared with last year.
Central Europe continued to dominate in respect to consolidated assets with a share of 41 per cent. As in the previous year, Southeastern Europe had the second-largest share at 30 per cent (minus 2 percentage points versus the comparable period), followed by the CIS at 29 per cent (plus 2 percentage points).
Profit outlook adjusted
Raiffeisen International's goal for consolidated profit in 2008, which has been adjusted by
5 per cent due to the changed market situation, is about 950 million euros. Due to the current market environment the company will review its mid-term targets. The new targets will be announced at the publication of the full-year results 2008 in March 2009.
Raiffeisen International operates one of the largest banking networks in CEE. 17 markets in Europe's growth region are covered by subsidiary banks, leasing companies and a range of other financial service providers. 14.6 million customers are serviced in more than 3,100 business outlets. Raiffeisen International is a fully consolidated subsidiary of Raiffeisen Zentralbank Osterreich AG (RZB), which owns more than two-thirds of the common stock. The remainder is in free float, the shares are listed on the Vienna Stock Exchange. RZB is a leading corporate and investment bank in Austria and the central institution of the Austrian Raiffeisen Banking Group, the country's largest banking group.