With watering eyes and a hacking cough, the chairman of the board of management of Raiffeisen International (RI) bravely overcomes his flu to enumerate in a gravelly voice the many advantages of being a first mover, a characteristic of the Vienna-based bank’s roaring expansion eastwards and southwards into higher growth economies.
“The first-mover advantage for us is to build – in most cases from scratch – in a difficult environment that is untapped by international banking. But customers appreciate what you are offering so you can select the cream of the cream of customers and attract the best staff. Even your relationship with the authorities as a newcomer means you get closer relationships with the finance minister, prime minister and central bank. You create an early environment of trust,” he says.
“You bring modern banking, which they want. You act as a door opener for foreign direct investment. You open the door to the money of the population, which has been lying under a mattress for 20 years. You create funds for the real economy, otherwise funds have to be imported. The advantages are manifold and the reason we are invited in.”
On the move
| Herbert Stepic, the architect of the foreign thrust of parent RZB Group through subsidiary RI, which has increased its number of, mainly retail, customers to more than 10 million from only 1.9 million at the end of 2002, is almost constantly on a plane visiting RI’s banks in Poland, Hungary, Czech Republic, Slovakia, Slovenia, Ukraine, Russia, Romania, Bulgaria, Belarus, Kosovo, Albania, Bosnia & Herzegovina, Serbia & Montenegro and Croatia, as well as its representative offices in many other countries. |
RI posted a record 83% increase in earnings in 2005 to €382m. Organic profit growth was more than 70%, proof that the bank is not dependent on acquisitions. According to research firm Fox-Pitt, Kelton, the 2005 results show that the bank’s medium-term targets are realistic. These include increasing the 21% of profit that comes from retail banking to 40% by 2008 – the bank was originally a wholesale bank – and increasing return on equity to 25% from 21.8%. FPK’s April report also points out that the shares trade at a price/earnings ratio of 19x estimated 2006 profits, a premium to its competitor Erste Bank, “but this is to some extent justified given the higher earnings growth rate”.
The drawbacks
What are the potential downsides in this stupendous growth story?
One is the excessive dependence on 59-year-old Mr Stepic, who is the key figure in relations with parent RZB Group, sitting on its board, and is RI’s chief executive officer as well as chairman. He disagrees that there is too much reliance on him, however. “[The bank] is definitely not dependent on one man. If there is one thing I am extremely proud of it is the quality of people working with me on the board and board minus one [division heads]. Success comes from the field,” he says. But he adds: “The art of any manager is to timely find a replacement, which I am doing now.”
Another potential downside is a sale of RZB Group’s 70% stake in RI. Due to its subsidiary’s operations, 56% of RZB Group’s pre-tax profit and 42% of its assets come from central Europe, south-eastern Europe and the Commonwealth of Independent States. Most of the rest of RZB Group’s pre-tax profit of €929.9m originates in Austria. In April last year, the Austrian bank floated a 30% stake in RI in the country’s largest ever initial public offering and one that was 22 times oversubscribed, bringing in €1.1bn in funds to be used for expansion.
Although a sale looks unlikely – because RZB’s strongest growth is coming from its subsidiary and, as Mr Stepic says rhetorically: “I don’t know an alternative investment for them [that would see a] 22% return year on year” – an opportunistic disposal to the many banks that are looking for access to higher-growth emerging markets cannot be ruled out.
“It would be over his dead body,” says someone who knows the bearded chocoholic well.
Related to this is RZB Group’s possible acquisition of Bawag, Austria’s scandal-plagued, fourth largest bank, which put itself up for sale recently. With total assets of about €56.3bn, the largest branch network in Austria and turnaround potential, it could provide economies of scale for RZB. Its ownership by the unions, however, and possible litigation related to its travails with US futures broker Refco are obvious disadvantages, and its purchase would lower RZB Group’s exposure to its most profitable RI arm.
“In principle [we will look at it]. It would be totally wrong not to look at any new business opportunity in the home market,” says Mr Stepic, speaking with his RZB Group hat on, yet sounding deeply uninterested in the acquisition (or perhaps the flu is responsible for his tone).
Risk exposure
A third potential downside is the bank’s exposure to “some high-risk countries with volatile macroeconomic conditions”, noted Fox-Pitt, Kelton in its report. RI is the number one bank in Albania, Bosnia & Herzegovina and Serbia & Montenegro. EU enlargement fatigue means that there is a reluctance to include the Balkans in the club – what Austrian chancellor Wolfgang Schüssel calls western Europe’s “psychological problem” but which could turn into the Balkans’ problem if they are not allowed in.
“If you take the carrot away then the likelihood of confrontation will grow from one day to another. We are talking very fresh, new democracies and EU [acceptance] is a crunch for that process,” says Mr Stepic. He admits that political upheaval might result, which would affect RI’s banking operations in those countries. He refuses, understandably, to be drawn on which countries might see more turmoil and blows his nose to put an end to the topic.
What the Cuban cigar lover does not mention when talking of first-mover advantage is that it allows the bank to get to know which local banks are the most promising ones to buy. This has served it well and continues to do so, as evidenced in Romania, Russia and Ukraine. RI is involved in the tender for Romanian savings bank CEC, which would, including its existing bank which is in a number three position, give it a combined market share of about 13% in an economy with a population of about 21.7 million and a bank assets/GDP ratio of only 38%.
The country where RI expects to see the highest growth, though, is Russia. At the end of January, it announced the purchase of Impexbank, a mainly retail bank with an expansive regional network. The timetable is more or less on track, with a closing expected this month. The full operational merger will be in 2007, placing the merged bank as the seventh largest in Russia.
“[The fastest growth] will definitely be in Russia because it is the largest market and it is grossly underbanked with regard to quality banking,” says Mr Stepic.
In Ukraine, RI has put its 39-branch, mainly corporate bank up for sale on the back of unsolicited approaches from several interested parties. This is a purely opportunistic move due to the high demand for banks in that country. The sale – if a high enough price is offered – must happen quickly because otherwise RI wants to start merging its existing subsidiary with Bank Aval, the second largest Ukrainian bank, which it bought last year, which makes it the largest bank in the country.
Turkey off the map
Mr Stepic denies that a traditional Austrian bias makes him uninterested in expanding into Turkey – the Austrian government has been among the most vociferous in opposing Turkey’s full membership of the EU. Instead he mentions the structure of the economy where “banking is dominated by a small number of oligarchs, 16 or 20 names, who control the country, the economy, politicians and, of course, the banks. We would be totally at the mercy of those institutions.”
He cites the founding thesis of the EU, that economic ties would ensure peace on the continent, as a reason to include the Balkans. “There is a strong need for this society of states not to forget the peace vision of our forefathers,” he says, adding sharply: “They had not included Turkey.”
Mr Stepic, a married father-of-two, insists that he was not kicked out of primary school, as legend has it. However, he must have been a handful for his parents to send him to boarding school at the tender age of eight when it was not, and is not, usual practice in Austria. That troublemaking spirit, unusual in bank CEOs, is undoubtedly why RI was a first mover in so many markets where its rivals feared to tread. Banks need more entrepreneurs like him.
