A hare and tortoise story
Published: 01 December, 2008
Patrick Butler
When RZB announced its rights issue in October it was not in response to market pressure, but the final step of a three-year programme to build capital in line with the assets and liabilities of the growing bank. Writer Edward Russell-Walling.
As the hares – well, those hares that survive – lick their wounds, this is the day of the tortoise. No one is suggesting that Austria’s Raiffeisen Zentralbank (RZB) is a plodder but, in the scheme of things gone by, its business model is definitely conservative. When it asked shareholders for more capital recently, this was no knee-jerk response to an emergency but simply the final step in a three-year plan.
“When we announced the rights issue, some people said ‘RZB must need capital’,” says Patrick Butler, member of the board at RZB. “In fact, it was the third and final tranche of a programme that had to be voted on each year by shareholders.”
Mr Butler points out that his is a growing bank, with an obvious need to build capital in tandem with its assets and liabilities. “That has always been the policy and we access capital in a number of ways,” he says. As a profitable entity, the bank is able to book reserves each year. This year there has been a private placement of €250m ($317.5m) in Tier 1 capital. A fully subscribed €1.2bn rights issue for RZB’s 69%-owned but publicly listed subsidiary, Raiffeisen International (RI), was completed in October 2007.
An enviable position
RZB is in the enviable position of being unlisted, with deeply committed shareholders. It is 88% owned by eight Austrian landesbanks. The balance is spread among other Austrian financial institutions, including the national co-operative banking flagship, Österreichische Volksbanken, with 5%.
Back in 2006, these shareholders agreed to a programme for strengthening the bank’s capital by €475m, to be raised in three equal annual chunks. This latest issue, which closed in early-November, raised €166m and was, unsurprisingly, 100% subscribed.
Listed as it is on the Vienna Stock Exchange, RI has access to the public markets for capital. It has banking operations in 17 central and eastern European countries, where it is often among the top three institutions. On both counts, it is much more exposed than its parent to the shifting winds of public sentiment, as its share price currently attests.
Investors’ views
In last year’s rights issue, shareholders were offered new shares at €104 apiece. This year, the stock fell along with investors’ general view of banking. However, after the announcement of (rather impressive) third-quarter results in October, RI shares fell below €30, as investors worried over poor results from Russia.
Mr Butler accepts that RI’s business is tough at the moment but insists that it is also “sound”, with a growing retail deposit base. The company’s own guidance for 2008 consolidated profits has been downgraded – but not by much. In November, it said it no longer expected profits of €1bn but, instead, of €950m.
“While others have been announcing significant losses, RI will report a record profit,” says Mr Butler. “RZB has the advantage of no direct exposure to the US subprime sector, and indirect exposure equal to only €24m. And we are a ‘stick-to-the-knitting’ bank. We have not been big players in high-risk credit markets.”
RZB will be hit by its exposure to Lehman Brothers and Icelandic banks but it should still produce solid results at the end of this year, adds Mr Butler.
As the nation scrambles
The Austrian government is putting together a capital package to assist the nation’s banks. RZB is not soliciting state aid but would not necessarily turn its back on it. “When the package is in place, RZB will certainly look at it,” confirms Mr Butler. “If other banks are taking state capital, it might be a competitive disadvantage not to do so,” he adds.
The group would not get involved in any structure that gave voting rights to the state, but would definitely consider participation capital with no voting rights. To that end, it was holding an extraordinary general meeting to authorise up to €2bn in participation notes as The Banker went to press.
While RZB remains strongly capitalised, there may be pressures to beef up regulatory capital further. “The landscape has changed over the past few months,” Mr Butler acknowledges. “A lot of banks are voluntarily increasing their capital ratios or being required to do so. We are looking at that and will take action if necessary.”
The group has targeted a Tier 1 capital ratio (including market and operational risk) of 7% which, in the absence of new drama, it is likely to achieve at year-end. “In the future, I suspect we will be aiming more in the region of 8% and above,” predicts Mr Butler.
“But our business model will continue to function well. We have the ability to ask our customers to pay an adequate price for credit. We are not getting squeezed in a major way by the increased cost of finance – unlike competitors who operate in a lower margin environment.”
