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Raiffeisen International defies global financial market crisis with record results

Raiffeisen International Bank-Holding AG, which is part of the Raiffeisen Zentralbank Österreich AG (RZB) Group, once again achieved a record result based on strong customer business.

Consolidated profit (after tax and minorities) for the first half 2008 rose by 41 per cent to 566 million euros (HY 2007: 401 million euros). Profit before tax grew by 39 per cent to 843 million euros (HY 2007: 607 million euros). Earnings per share rose from 2.82 euros for the first half 2007 to 3.68 euros. All figures are based on International Financial Reporting Standards (IFRS).

Herbert Stepic, CEO of Raiffeisen International, commented on the results, "It is a robust sign of the strength of our business model that we are presenting a record result again despite the turbulence on the global credit and capital markets. This record result is due to a dynamic development of our customer business. Our semi-annual result proves that we have a sound grip on the indirect consequences of the global financial crisis for our business. We stick to our targets."

The strong rise of consolidated profit compared with the first half of last year is mainly due to profit from operating activities. The main earnings driver was again net interest income with a plus of
39 per cent, while net commission income increased by 23 per cent. General administrative expenses rose by 25 per cent, while new allocations to provisioning for impairment losses were raised by 31 per cent. Income tax (including deferred tax) increased by 52 per cent and reduced earnings by 196 million euros.

"Central and Eastern Europe still shows real economic growth rates which are two to three times higher than in the Eurozone. This fact and the very positive development of our operating business combined with the continued growth of our customer base by almost 700,000 in the first six months of 2008 underline my conviction that we will be able to continue our sustained growth trend", said Stepic.

Balance sheet total above 80 billion euros for the first time

Raiffeisen International took advantage of the favourable growth environment prevailing in CEE once again in the first half of 2008 and considerably expanded its customer business. Loans and advances to customers grew by 15.8 per cent to 56.6 billion euros (year-end 2007: 48.9 billion euros), while deposits from customers increased by 7.8 per cent to 43.6 billion euros (year-end 2007: 40.5 billion euros). The balance sheet total advanced by 10.9 per cent to 80.7 billion euros on 30 June.

Strong earnings growth in customer business – Operating income plus 30 per cent

The operating result of Raiffeisen International continued to develop positively in the first six months of 2008. Operating income grew by 30 per cent to 2.28 billion euros compared to the first half of 2007 (HY 2007: 1.75 billion euros).

The very gratifying development of net interest income, which is the most important earnings component for Raiffeisen International, continued in the second quarter. Net interest income grew by 39 per cent on the comparable period last year from 1,079 million euros to 1,498 million euros. The increase was thus substantially above that of the average balance sheet total of 29 per cent. In the reporting period, there were no material effects due to changes in the scope of consolidation. Net interest income in the retail customer segment grew by 202 million euros, or 31 per cent, on the comparable period in 2007 to 860 million euros. The corporate customer segment registered a plus of 42 per cent to 512 million euros. Significant increases of net interest income were registered in all regional segments. Group units developed best in the CIS, where the increase amounted to 43 per cent, mainly due to higher interest margins in Russia. The plus came to 36 per cent in Central Europe, and 37 per cent in Southeastern Europe. The total interest margin improved by 27 basis points on the first half of 2007 to 3.93 per cent. It was also 7 basis points higher than the full-year figure for 2007 despite heightened funding costs due to the global financial crisis.

Net commission income rose by 23 per cent to 703 million euros. After the considerable pluses in the preceding periods, that growth was somewhat weaker due to lower income from securities transactions and other banking services. Significant increases were achieved in the main earnings components. Foreign exchange and notes/coins business contributed with a plus of 35 per cent to 221 million euros, and loan and guarantee business grew by 38 per cent to 92 million euros. A result of 305 million euros was achieved in the area of payment transfers, which represents a plus of 23 per cent. Growth of net commission income from corporate customers amounted to 25 per cent, and from personal customers to 24 per cent, with almost two-thirds of the total contributed by personal customers. Viewed regionally, growth of net commission income was strongest in Southeastern Europe with a plus of 28 per cent to 221 million euros, followed by Central Europe at 22 per cent to 270 million euros and the CIS at 19 per cent to 212 million euros.

With a plus of 16 per cent, trading profit was below the growth of other operating profit components. It rose by 13 million euros to 92 million euros. The main earnings component was net income from currency-related business, which more than doubled from 43 million euros last year to 89 million euros.

Other operating income amounted to minus 11 million euros after income of 21 million euros last year. This figure includes the effects of consolidating asset management companies in Slovakia, Hungary, and Croatia for the first time, which resulted in a gain of 13 million euros due to the related release of negative goodwill through the income statement.

Continued high capital expenditures for the expansion and improvement of distribution channels

Compared with the year-earlier period, general administrative expenses rose by 247 million euros, or 25 per cent, to 1,250 million euros. No noteworthy effects arose from changes in the scope of consolidation. Because of the relatively moderate increase of general administrative expenses despite continuing capital investment in distribution channel expansion, the cost/income ratio improved by 2.8 percentage points to 54.8 per cent.

Staff expenses accounted for 49 per cent, and hence the largest share, of general administrative expenses. They increased by 120 million euros, or 24 per cent, to 612 million euros. Wages and salaries were responsible for 77 per cent of staff expenses. The share of statutory social security costs amounted to 19 per cent, and voluntary staff expenses made up 3 per cent of the total. The increases in the regions varied. While staff expenses went up by 27 per cent in Central Europe, and by 25 per cent in Southeastern Europe, the rise in the CIS was the smallest at 20 per cent.

The average number of staff rose by 6,333, or 12 per cent, compared with the first half of 2007 to 60,236. With a plus of 3,320 employees, or 24 per cent, Southeastern Europe registered the largest increase in the average number. In Central Europe, the average number of staff grew by 1,699, or 15 per cent, while the figure for the CIS was 1,264, or 5 per cent, above that of the year-earlier period.

Other administrative expenses registered a higher percentage increase than that of staff expenses. They grew by 28 per cent, or 115 million euros, on the comparable period to 521 million euros. At 40 per cent, the strongest rise of other administrative expenses was in the CIS, particularly because of higher rental expenses, while the increase in Central Europe came to 23 per cent, and in Southeastern Europe to 19 per cent. The largest expense items were office space at 141 million euros (plus 34 per cent), IT expense at 67 million euros (plus 28 per cent), and advertising expense at 61 million euros (plus 21 per cent).

The number of business outlets came to 3,077 at the end of June 2008. That represents a net addition of 62 business outlets in the reporting period. New outlets were opened predominantly in Southeastern Europe (75), and there particularly in Romania (34) and Bulgaria (27). In the CIS, 29 branches were closed on balance in the course of further optimization measures, with many new branches currently in preparation especially in Russia.

Cautious risk policy – Provisioning for impairment losses increased by 31 per cent

New allocations to provisioning for impairment losses rose by 31 per cent, or 48 million euros, compared with the year-earlier period to 201 million euros. Group units in Central Europe, and especially in Hungary and the Czech Republic, are responsible for 37 per cent, or 75 million euros, of that, which represents an increase of 24 million euros on the comparable period last year. That was due in particular to a worsening economic trend in Hungary. Provisioning for impairment losses in Southeastern Europe, and particularly in Croatia, Bulgaria, and Albania, rose by 36 million euros compared with the first half of 2007, of which more than two-thirds were portfolio-based loan loss provisions. On the other hand, in contrast to Central Europe and Southeastern Europe, provisioning declined significantly in the CIS, by 12 million euros to 69 million euros net.

The risk/earnings ratio developed favourably and decreased by 1.4 percentage points to 13.4 per cent. More than 77 per cent of all provisions were formed for retail customers, and the corporate customer segment accounted for the rest.

Strong capitalization – Core capital ratio (credit risk) at 9.6 per cent

Equity shown on Raiffeisen International’s balance sheet increased by 9 per cent, or 624 million euros, from the end of 2007 to 7,246 million euros. Set against that plus, resulting from the current year’s profit of 646 million euros and capital contributions from minority shareholders to various Group units in the amount of 53 million euros, is a profit distribution of 182 million euros.

Furthermore, positive changes in the exchange rates of some CEE currencies, minus associated capital hedges, caused equity to increase on balance by 132 million euros. The greatest effects came from the revaluation of the Slovakian, Hungarian, and Czech currencies.

Since 1 January 2008, solvency has been calculated according to Basel II. In the absence of equivalent comparative figures for the end of 2007, the values are compared with the regulatory own funds requirement calculated according to the old Basel I rule.

Regulatory own funds increased by 8 per cent, or 508 million euros, to 7,192 million euros. That does not include the current profit of the reporting year, which may not be taken into account yet in the calculation because of applicable Austrian regulations.

Core capital (Tier 1) was nearly unchanged with a plus of 58 million euros to 5,750 million euros. The 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.

Set against own funds is a regulatory own funds requirement of 5,587 million euros, which results in excess cover of about 29 per cent. The requirement amounted to 4,317 million euros at the end of the year under the old regulation, and the increase of 1,270 million euros is largely due to the Basel II effect, and especially to the newly included own funds requirement for operational risk, which amounts to 441 million euros.

The ratio of core capital to credit risk fell accordingly by 1.8 percentage points to 9.6 per cent, and the own funds ratio decreased by 2.1 percentage points to 10.3 per cent. "Our capital resources are among the best of all banks in the region. Together with our balanced refinancing mix, in particular including high customer deposits, this is a considerable competitive advantage especially in the light of a market environment which is characterised by uncertainty", said Martin Grüll, CFO of Raiffeisen International.

Record result in second quarter 2008

With a consolidated profit of 311 million euros for the second quarter 2008, Raiffeisen International recorded the best quarterly result in its history (discounting the one-off effect from the sale of Raiffeisenbank Ukraine in the fourth quarter 2006). This represents an increase of 57 million euros or 22 per cent compared with the first quarter 2008. Net interest income after provisioning reached 678 million euros in the second quarter 2008, which is also a record and was 37 per cent above the same quarter of the previous year. Net commission income amounted to 372 million euros, with an increase of 25 per cent significantly higher than in the same quarter of 2007.

Segment reporting

The business activities of Raiffeisen International are divided into business and regional segments.

Business Segments

The corporate customer segment again registered significant earnings growth. Profit before tax rose by 51 per cent on the comparable period to 484 million euros (HY 2007: 321 million euros) and was based largely on operating business. An increase of net interest income by 42 per cent to 512 million euros (HY 2007: 362 million euros) had a very positive effect. Despite the volume growth, provisioning for impairment losses fell by 12 million euros below last year’s level to 45 million euros. General administrative expenses rose by 29 per cent to 259 million euros (HY 2007: 200 million euros). The cost/income ratio improved further to 32.8 per cent (HY 2007: 34.7 per cent). The return on equity fell slightly, by 2.1 percentage points to 28.4 per cent, because of the sharply increased equity base. The risk-weighted assets for credit risk according to Basel II came to 31.4 billion euros, which means an increase of 49 per cent on 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 to the public sector with higher risk weightings. The segment’s share of total earnings rose by 5 percentage points to 57 per cent.

Profit before tax in the retail customer segment improved by 29 per cent on the comparable period to 288 million euros (HY 2007: 223 million euros). The new allocations to impairment loss provisioning rose by 61 per cent to 155 million euros, and the general administrative expenses increased by 25 per cent to 875 million euros. The return on equity fell slightly, by 1 percentage point to 28.1 per cent, due to the sharp increase of the equity base last year. Operating income from the retail customer segment rose by 29 per cent to 1,317 million euros, with the greatest growth coming from net interest income at 31 per cent. Despite continued high general administrative expenses, the cost/income ratio improved by 2.3 percentage points to 66.4 per cent.

Risk-weighted assets (credit risk) came to 17.6 billion euros at the end of the first half-year, which is a plus of only 15 per cent on the value from the comparable period last year calculated according to the Basel I rules. The Basel II rules result in a lower weighting of the credit volume of retail customers. The segment’s share of total earnings fell by 3 percentage points to 34 per cent.

The treasury segment made a considerable earnings contribution of 155 million euros (plus 69 per cent). That was achieved despite increased general administrative expenses mainly through improvement of net interest income by 133 per cent.

The segment participations and other recorded a loss of 84 million euros (HY 2007: minus 29 million euros) for the reporting period. The segment comprises all non-banking activities and equity holdings. Furthermore, the segment includes the costs of central group management, especially from the Group Head Office in Vienna.

Regional Segments

Of the three regional segments, the CIS registered the highest profit before tax in the first half of 2008 at 306 million euros. The strong earnings increase of 75 per cent, or 132 million euros, is primarily attributable to high interest income, moderate new allocations to provisioning, and valuation gains. Balance sheet assets grew by 23 per cent on the year-earlier period. The CIS contributed 36 per cent to total profit before tax and was thus 7 percentage points above its share in the comparable period last year.

Southeastern Europe generated the second-highest profit before tax at 284 million euros. This considerable increase of 29 per cent, or 64 million euros, was based mainly on solid growth of net interest and commission income and a lean cost structure. The contribution to total profit before tax amounted to 34 per cent, which represents a decline on the year-earlier figure by 2 percentage points. Balance sheet assets grew by 21 per cent compared with last year.

In Central Europe, profit before tax improved by 19 per cent, or 41 million euros, to 253 million euros. Increases in net interest and commission income were mainly responsible for that. This regional segment contributed 30 per cent to total earnings, which represents a decline by 5 percentage points on the year-earlier figure, which was positively influenced by non-recurring items. Balance sheet assets rose by 39 per cent compared with last year, which is the strongest increase of all the segments.

Central Europe continued to dominate in consolidated assets with a share of 43 per cent, which represents an increase of 3 percentage points. As in the previous year, Southeastern Europe had the second-largest share at 31 per cent, followed by the CIS at 26 per cent.

Outlook and targets unchanged

Building on Raiffeisen International's successful mid-market strategy, the corporate customers segment will make the largest contribution to profit before tax again in 2008. In the retail business, the company continues to emphasize expansion of the branch network to support the broadening of the customer base. Moreover, it will further develop its product range in the areas of asset management and insurance in the current year.

Raiffeisen International's goal for consolidated profit in 2008 is about 1 billion euros.

The group aims to grow the balance sheet total by at least 20 per cent per year in the period to 2010, with the strongest increases targeted in the retail customer segment.

Raiffeisen International has set a return on equity (ROE) before tax of more than 25 per cent as a goal for 2010. That does not take account of any acquisitions or capital increases. The cost/income ratio should come to about 56 per cent, and the target risk/earnings ratio is about 15 per cent.

• Additional information
• Key Financial Data Raiffeisen International - 1st half 2008 (21 KB)