Against the backdrop of persistently difficult market conditions, the group of Raiffeisen Zentralbank Osterreich AG (RZB) achieved a remarkable result. It generated a profit before tax of EUR 824 million, surpassing the 2008 result by 38 per cent. Fully consolidated subsidiary Raiffeisen International Bank-Holding AG showed a profit before tax of EUR 368 million.
«The RZB Group showed a solid development even in the most difficult year of the economic crisis. Our conservative policy regarding provisioning for impairment losses notwithstanding, our profit rose significantly», said RZB-CEO Walter Rothensteiner. «This result shows not only the strength of our business model, but also the quality of our steering measures as well as the strong cohesion within the Austrian Raiffeisen Banking Group.»
In 2009, as in the previous year, RZB’s performance was seriously impacted by the effects of the global economic crisis. This was particularly apparent both in the significant reduction in business volumes and the sharp rise in non-performing loans and provisioning for impairments. Nevertheless, financial market prices in general did rally, which generated valuation gains to offset the considerable valuation losses in 2008.
Despite severe economic downturns in most CEE countries and Austria, RZB’s operating result in 2009 slipped just 7 per cent year-on-year to EUR 2,588 million following a record-high operating result in 2008, where the best results within the group’s history have been achieved.
The decline was mainly the result of a 9 per cent drop in operating income. This in turn was driven by a 14 per cent fall in net interest income, down by EUR 549 million, and an even steeper hit for net fee and commission income, down 20 per cent or EUR 345 million. The decline in business volumes was responsible in both cases, as the economic crisis curbed demand for credit and banking services.
However, net trading income advanced a healthy EUR 400 million due to write-ups on financial instruments, after unfavourable market conditions had caused valuation losses the previous year.
General administrative expenses did well, down 10 per cent against the previous year to EUR 2,795 million as a result of far-reaching cost-cutting measures and currency effects.
Net interest income remained a dominant factor, contributing 64 per cent of RZB’s operating income. However, as net interest income was down 14 per cent in absolute terms at EUR 3,462 million, its share in operating income declined 4 percentage points, largely linked to reduced business volumes, currency effects and the narrower margins associated with higher refinancing costs in some markets.
In regional terms, the Austria and Rest of the World segments recorded the largest falls, with net interest income down 19 per cent and 30 per cent respectively. Russia also experienced an above-average drop, falling 15 per cent.
Alongside lower business volumes, the Group’s interest margin also narrowed 42 basis points to 2.25 per cent. Although interest margins contracted in all segments, the steepest declines were recorded in Russia (down 67 basis points)
and the Rest of the World segments (down 30 basis points).
The fall in net fee and commission income was even more pronounced: down 20 per cent, or EUR 346 million, to EUR 1,422 million. Consequently, its contribution to operating income slipped 4 percentage points to 26 per cent. The Austria segment posted the most pronounced fall at 34 per cent, largely triggered by lower commission income from the securities business. However, the CIS Other segment (down 25 per cent) and Central Europe (down 23 per cent) were also affected, with income from banking services curbed by lower business volumes linked to the recession.
Within the Group, over half of the fall in net commission income stemmed from lower income from foreign exchange and notes and coins, where foreign currency lending and international payment transfers shrank 33 per cent. Payment transfers, which made up 40 per cent of net fee and commission income, also registered a 15 per cent decline in results.
By contrast, net trading income climbed from EUR 19 million to EUR 419 million. There was a marked change in individual income components against the previous year. After massive interest rate fluctuations caused by the global financial crisis put income from interest-related trading at minus EUR 275 million in 2008, it climbed to EUR 368 million in 2009, largely as a result of write-ups on securities and interest derivatives.
By contrast, currency-related transactions declined, with net trading income sinking from EUR 268 million to EUR 110 million. This was largely linked to the revaluation of currency forward transactions in Russia to reflect interest rate and exchange rate differences between the Russian rouble and the US dollar. In the previous year, the same effect generated valuation gains.
Comprehensive cost-cutting measures introduced in response to the economic downturn combined with currency effects served to reduce general administrative expenses during the year under review by 10 per cent, or EUR 322 million, to EUR 2,795 million. Staff and other administrative expenses declined by 12 per cent, while depreciation charges were up 3 per cent due to investments in new software systems.
Staff expenses fell EUR 182 million to EUR 1,387 million, but still made up 50 per cent of total operating expenses. The average number of staff was down 2 per cent (1,161 staff) to 63,469, primarily as a result of cutbacks in the CIS Other (down 7 per cent) and Rest of the World (down 5 per cent) segments, while staff were added in the Austria (plus 7 per cent) and Central Europe (plus 2 per cent) segments. Other administrative expenses were down EUR 149 million at EUR 1,101 million. The bulk of cost savings were achieved through cuts in advertising, PR and promotional expenses (down 37 per cent), travelling expenses and office costs, while the largest item, office space expenses, still made up 30 per cent of other administrative expenses.
The 10 per cent reduction in general administrative expenses just exceeded the 9 per cent fall in operating income. This benefited one of the key measures of a bank’s efficiency, the cost/income ratio, which describes the relationship between general administrative expenses and operating income. During the period under review, this ratio improved by 0.9 percentage points, from 52.8 per cent to 51.9 per cent.
Although RZB’s operating result fell by only 7 per cent in the year under review, net valuation gains and losses in the wake of the global financial and banking crisis and the economic crisis in Central and Eastern Europe had an impact on results.
As the recession triggered an upsurge in non-performing loans among both retail customers and corporate customers, provisions for impairment losses were increased by 95 per cent to EUR 2,247 million. However, income from derivatives and financial investments was back in the black, with write-ups of impairment losses resulting in a shift from minus EUR 1,049 million to plus EUR 482 million.
As a result, profit before tax advanced 38 per cent, from EUR 597 million to EUR 824 million.
The marked downturn in borrower creditworthiness and ability to pay entailed a significant increase in charges to provisions for impairment losses in 2009, up 95 per cent, or EUR 1,096 million, to EUR 2,247 million.
While higher volumes of non-performing loans caused a 156 per cent net rise in individual loan loss provisions, portfolio loan loss provisions fell by 47 per cent. The risk/earnings ratio was considerably higher on balance, rising from 28.7 to 64.9 per cent.
Charges to provisions for impairment losses in 2009 totalled EUR 1,222 million for corporate customers, outstripping provisions for private individuals (EUR 808 million). Provisions for impairment losses for banks were also required in 2009 and came to EUR 215 million compared with EUR 236 million in the previous year.
Broken down by segment, the lion’s share of new provisions for impairment losses was made in CIS Other, with a share of 23 per cent or EUR 514 million (up 184 per cent), which made for a risk/earnings ratio of 105.3 per cent. In Austria, total provisions including provisions for banks amounted to EUR 449 million, with a risk/earnings ratio of 65.4 per cent. In the other regions, the risk/earnings ratio ranged between 37 and 50 per cent.
Price falls linked to the financial crisis resulted in sizeable valuation losses in 2008, but the financial markets gradually steadied over the period under review. Some of the losses were offset by reversals of impairment losses in 2009. Following a net loss on securities held in inventory (at fair value) of EUR 1,077 million in 2008, net income came to EUR 396 million in the year under review. The structured products included in this category generated net income of EUR 30 million (2008: minus EUR 313). Securities held to maturity, which recorded a EUR 36 million loss from defaults in the previous year, generated net income of EUR 15 million from the disposal of small portfolio.
Derivatives also generated a positive result. The improved net income was mainly the result of credit derivatives (CDS) write-ups and recoveries totalling EUR 59 million (2008: minus EUR 124 million) and EUR 112 million in valuation gains on other derivatives caused by interest rate movements.
Income tax rose 54 per cent in 2009 to EUR 254 million, growing slightly faster than profit before tax, which gained 38 per cent. As a result, RZB’s theoretical tax rate rose from 28 to 31 per cent. While income taxes in the CEE region sank from EUR 366 million to EUR 92 million due to the drop in profits, deferred tax assets from 2008 had to be written off in Austria. As a result, income taxes in Austria totalled EUR 143 million.
Return on equity (ROE) before tax advanced from 7.3 to 8.8 per cent in line with the increase in profits. The average equity on which this ratio is based amounted to EUR 9,333 million, up 14 per cent or EUR 1,108 million against the previous year. An increase in participation capital was offset by negative currency differences and dividend payments. Consolidated ROE — based on the capital attributable to the shareholders of Raiffeisen Zentralbank — improved considerably, climbing from 0.9 per cent to 6.3 per cent as a result of the change in profit structure.
Earnings per share also advanced, from EUR 6.40 to EUR 36.50. The average number of ordinary shares in circulation was 5,540,000 as at the end of 2008; there was no change in the share capital in 2009. A dividend of EUR 23.2 per ordinary share will be proposed for 2009.
RZB’s balance sheet total was EUR 147.9 billion as at 31 December 2009, a reduction of just under 6 per cent, or EUR 9.0 billion, against year end 2008. The balance sheet total includes currency effects of approximately EUR 2 billion resulting from the depreciation of the US dollar and certain CEE currencies. Changes in the consolidated group did not have any significant effect on the balance sheet total.
The decrease was caused by two key factors: the impact of measures to reduce and stabilize the loan portfolio and the marked slowdown in demand for loans in some markets. The resulting fall in loans and advances to customers brought the balance sheet total down by EUR 10.1 billion. Changes in provisioning for impairment losses in the period under review also reduced the balance sheet total by a further EUR 1.9 billion.
The fall in balance sheet total generated by these measures and effects was partly offset by building up short to medium-term investment positions in top-quality securities (primarily government and government-guaranteed bonds). This increased the the balance sheet total by around EUR 6.7 billion in financial investments (asset side).
On the liabilities side, the expanded investment portfolio resulted in an 8 per cent drop in the refinancing base to EUR 50 billion in deposits from banks. Increased efforts to attract customer deposits meant that deposits from customers fell by just 6 per cent to EUR 55.4 billion. The decline was most pronounced among key accounts and the public sector, while deposits from retail customers increased by EUR 0.9 billion despite currency effects.
RZB’s equity including minority interests and profit from 2009 rose by 20 per cent, or EUR 1,721 million, to EUR 10,308 million as at the reporting date.
In April, Raiffeisen Zentralbank issued participation capital amounting to EUR 1,750 million, which was subscribed in full by the Republic of Austria. The first tranche of participation capital (EUR 750 million) was issued in December 2008 but was initially recognized as subordinated capital. As a result, the participation capital contained in the Group’s equity now amounts to EUR 2,500 million in total.
The equity on RZB’s statement of financial position was reduced by an additional EUR 257 million, of which EUR 150 million was distributed as a dividend to the shareholders of Raiffeisen Zentralbank.
In 2008, RZB completed the transition to the Basel II rules and was granted an authorization at the end of December 2008 for partial application of the internal rating based (IRB) approach. The RZB Banking Group has since used the IRB approach to measure risk for all non-retail divisions of Raiffeisen Zentralbank and in its subsidiaries in Croatia, Malta, Romania, Slovakia, the Czech Republic, Hungary and the US; all other Group units still use the standard approach to calculate credit risk.
The fall in business volumes, and especially the reduction of the loan portfolio, led to a significant decline in risk-weighted assets, which fell by almost 16 per cent in 2009 to EUR 74,990 million. Threequarters of this decrease related to Raiffeisen International, the rest to Raiffeisen Zentralbank. As a result, the own funds requirement for credit risk was EUR 5,999 million as at year-end, of which 46 per cent was calculated using the IRB approach. The own funds requirement for market risk including currency risk remained almost unchanged against the previous year at EUR 792 million, while the new approach led to a 25 per cent increase in the operational risk requirement to EUR 725 million. Overall, the own funds requirement for RZB slipped 12 per cent to EUR 7,516 million as at end-2009.
In 2009, own funds rose 14 per cent or EUR 1,507 million to EUR 12,308 million as a result of the EUR 1.75 billion increase in participation capital, which was wholly subscribed by the Republic of Austria.
Core capital contained in own funds was up 17 per cent to EUR 8,904 million, improving the core capital ratio by 2.4 percentage points to 9.4 per cent, core capital ratio, which is measured in relation to credit risk, rose by 3.4 percentage points to 11.8 per cent and own funds ratio improved by 2.9 percentage points to 13.1 per cent.
Raiffeisen Zentralbank Osterreich AG (RZB) and its exchange-listed subsidiary Raiffeisen International Bank-Holding AG disclosed already on 22 February 2010 that they were taking a closer look at a possible merger of the two companies as a possible strategic option. The boards of management of the two companies still confirm that they are continuing to intensively pursue this merger, which would bring RZB’s principal business areas — above all, its business with Austrian and international corporate customers — together with those of Raiffeisen International.
The merged bank would be strengthened in its position as one of the leading universal banks in Central and Eastern Europe (CEE) through the combination of Raiffeisen International’s broad distribution network in the CEE region and RZB’s comprehensive product portfolio. The same is true for its business relationships with Austrian and international corporate clients. The bank would remain listed on the Vienna Stock Exchange and would be active primarily in the areas of retail (in CEE), corporate and investment banking. The business associated with RZB’s function as central institution of the Austrian Raiffeisen Banking Group would be hived off into a non-listed bank holding.
«We want to take this step in order to ensure that we can reinforce and expand our excellent position in CEE and Austria in the years and decades to come,» said Walter Rothensteiner, Chairman of RZB’s Board of Management and Chairman of the Supervisory Board of Raiffeisen International. «Our home market will also provide good growth perspectives in the future, and through this step, the Raiffeisen Banking Group will secure its important role as core shareholder.»
«A merger will place us in an even better position to meet the needs of our more than 15 million customers by providing state-of-the-art product offerings,» added Herbert Stepic, CEO of Raiffeisen International and Deputy Chairman of the Board of Management of RZB. «One of the key arguments for this merger lies in the improved access to capital and money markets that the merged bank would enjoy in comparison to Raiffeisen International’s current status. This step also contributes to Raiffeisen International’s risk diversification and makes it possible to further optimize risk management for the Group in the future.»
An extensive description of our course of business, income statement and segment reports is provided in our Annual Report 2009: www.rzb.at/ar2009 (English version) or www.rzb.at/gb2009 (German version).