Credit Opinion: Raiffeisen Bank International AG
Global Credit Research - 25 Mar 2015
Vienna, Austria
Ratings
Category
Outlook
Bank Deposits
Baseline Credit Assessment
Adjusted Baseline Credit
Assessment
Senior Unsecured
Senior Subordinate -Dom Curr
Commercial Paper -Dom Curr
Other Short Term -Dom Curr
Moody's Rating
Rating(s) Under
Review
*Baa2/**P-2
ba3
***ba1
****Baa2
*****Ba2
******P-2
******(P)P-2
Parent: Raiffeisen Zentralbank
Oesterreich AG
Outlook
Bank Deposits
Issuer Rating
Bkd Senior Unsecured
Bkd Senior Subordinate -Dom
Curr
Rating(s) Under
Review
*Baa3/*P-3
*******Baa3
****Baa2
*****Ba2
* Rating(s) within this class was/were placed on review on March 17, 2015 ** Rating(s) within this class was/were
placed on review on December 23, 2014
*** Placed under review for possible downgrade on March 17, 2015
**** Placed under review with direction uncertain on March 17, 2015
***** Placed under review for possible downgrade on February 18, 2015
****** Placed under review for possible downgrade on December 23, 2014
******* Placed under review for possible upgrade on March 17, 2015
Contacts
Analyst
Swen Metzler/Frankfurt am Main
Andrea Wehmeier/Frankfurt am
Main
Carola Schuler/Frankfurt am Main
Phone
49.69.707.30.700
Key Indicators
Raiffeisen Bank International AG (Consolidated Financials)[1]
Total Assets (EUR million)
Total Assets (USD million)
Tangible Common Equity (EUR million)
Tangible Common Equity (USD million)
[2]9-14 [3]12-13 [3]12-12 [3]12-11 [3]12-10 Avg.
127,424.0127,040.3136,116.0146,985.0131,173.1 [4]-0.7
160,968.2175,054.2179,454.2190,807.8175,974.4 [4]-2.2
8,178.0 5,933.5 6,230.1 6,027.8 5,588.3 [4]10.0
10,330.8 8,176.0 8,213.7 7,824.9 7,496.9 [4]8.3
Problem Loans / Gross Loans (%)
Tangible Common Equity / Risk Weighted Assets (%)
Problem Loans / (Tangible Common Equity + Loan Loss
Reserve) (%)
Net Interest Margin (%)
PPI / Average RWA (%)
Net Income / Tangible Assets (%)
Cost / Income Ratio (%)
Market Funds / Tangible Banking Assets (%)
Liquid Banking Assets / Tangible Banking Assets (%)
Gross Loans / Total Deposits (%)
Source: Moody's
11.1
10.3
64.8
10.7
7.4
75.8
9.8
7.5
69.9
8.6
6.3
65.0
9.0 [5]9.9
5.9 [6]10.3
67.3 [5]68.6
3.0
3.2
0.3
60.2
34.4
26.6
83.9
2.9
2.3
0.4
69.1
34.9
28.7
83.5
2.4
2.4
0.6
66.8
39.3
23.9
86.4
2.6
2.4
0.7
63.5
43.3
30.2
77.9
3.5 [5]2.9
3.1 [6]3.2
0.9 [5]0.6
62.1 [5]64.3
44.1 [5]39.2
23.5 [5]26.6
85.4 [5]83.4
[1] All figures and ratios are adjusted using Moody's standard adjustments [2] Basel III - fully-loaded or transitional
phase-in; IFRS [3] Basel II; IFRS [4] Compound Annual Growth Rate based on IFRS reporting periods [5] IFRS
reporting periods have been used for average calculation [6] Basel III - fully-loaded or transitional phase-in & IFRS
reporting periods have been used for average calculation
Opinion
SUMMARY RATING RATIONALE
On March 17, we changed the review on Raiffeisen Bank International AG`s (RBI) Baa2 long-term debt and
deposit ratings to direction uncertain. We extended the review for downgrade on RBI's ba2 subordinated debt
ratings and its Prime-2 short-term ratings. RBI's ba3 standalone Baseline Credit Assessment (BCA) is unaffected.
In addition, we placed on review for upgrade Raiffeisen Zentralbank Oesterreich AG's (RZB), the parent company
of RBI, Baa3 long-term deposit and issuer ratings as well as its Prime-3 short-term deposit ratings. We changed
the review on certain Baa2 rated backed debt ratings of RZB that benefit from an unconditional and irrevocable
guarantee from RBI to direction uncertain. We extended the review for downgrade on RZB's ba2 rated backed
subordinated debt ratings and its B1(hyb) rated backed preferred security notes issued by RZB Finance (Jersey)
III and IV.
The review was prompted by the expected effects on RZB's and RBI's long-term ratings resulting from the
implementation of our new global bank rating methodology and a review of systemic support considerations. The
review will focus on the analysis of RZB's liability structure, most notably the expected waterfall within its deposit
and debt classes in resolution and the respective volume of each debt class, but also on the impact of lower
systemic support. The most likely outcome for RZB's and RBI's long-term debt and deposit ratings is Baa2
assuming that the positive impact from LGF may offset the negative effects from lower systemic and affiliate
support.
During the review period, we will also re-assess Raiffeisen Bankengruppe Austria's (RBG or 'the Group', unrated)
ability and willingness to provide capital support to all of its Group members, including RBI, in an adverse scenario.
We consider the Group's capitalisation as moderate relative to RBG's overall credit profile, which is focused on,
and therefore strongly correlated with its higher-risk Central and Eastern European (CEE) operations housed at
RBI. To protect RBG against likely losses under an adverse scenario, comfortable capital resources above
minimum requirements would be required. These support assumptions are reflected in RBI's ba1 Adjusted BCA.
For RBI, our preliminary indication of the expected outcome following the review conclusion is Baa2 ratings for
long-term debt and deposits.
For RZB, our preliminary indication of the expected outcome following the review conclusion is Baa2 ratings for
long-term deposit and issuer ratings.
MACRO PROFILE
RBI's ba3 standalone BCA is unchanged under the new methodology. As a bank strongly engaged in Central and
Eastern Europe (CEE) and the Commonwealth of Independent States (CIS) and Austria, RBI's operating
environment is heavily influenced by the Macro Profiles of several Eastern European countries, in particular
Croatia, Hungary, Romania, Russia, and Ukraine. The macro score we calculated for the business of RBI is
therefore `Strong-`, which is below our `Very Strong-` assessment for Austria.
RBI's ba3 BCA reflects (1) a significant deterioration in the operating environment for the bank's Russian banking
activities, following the sharp depreciation of the rouble; (2) RBI's moderate asset quality related to exposures in
CEE and CIS; as well as (3) its moderate capitalisation compared to increased risks the bank faces from its
Russian and Ukrainian activities.
Rating Drivers
- Ongoing capital pressures triggered strategic review
- Continued pressure on RBI's asset quality in CEE/CIS
- Resumption of full earnings potential requires further cost optimisation and return to lower cost of risk
- Vulnerability due to some degree of wholesale funding
Rating Outlook
RBI's Baa2 long-term debt and deposit ratings and RZB's Baa2 rated backed debt ratings are on review direction
uncertain. The uncertain direction reflects multiple, in part offsetting reasons including the reassessment of affiliate
support uplift from RBG, the positive effects from our newly introduced LGF analysis, and the reduction or full
elimination of systemic support. Following the closure of the review, the most likely outcome are unchanged longterm debt and deposit ratings for RBI. The most likely outcome for RZB are Baa2 ratings for backed and nonbacked long-term debt and deposit.
RZB's Baa3 long-term deposit and issuer ratings are on review for upgrade reflecting these securities risks and
ranking under our advanced Loss Given Failure (LGF) analysis, which takes into account the severity of loss
faced by the different liability classes across the liability structure should the bank enter resolution.
RBI's ba2 subordinated debt ratings and RZB's ba2 rated backed subordinated debt ratings as well as its B1(hyb)
rated backed preferred security notes are on review for downgrade, reflecting these securities risks and ranking
under our advanced Loss Given Failure (LGF) analysis, as well as the reassessment of affiliate support uplift
because these securities are notched off RBI's ba1 Adjusted BCA.
What Could Change the Rating - Up
Upward rating pressure on RBI's and RZB's debt and deposit ratings would be subject to a higher BCA for RBI or
higher affiliate support from RBG, which we do not expect during the review period. A higher BCA for RBI would
require a significant and sustained reduction in the stock of non-performing loans (NPLs), stabilisation of market
conditions in Russia and Ukraine and a strengthening of RBI's capital buffers.
What Could Change the Rating - Down
Downward pressure on RBI's standalone ba3 BCA could develop if we were to assess (1) a reduced financial
strength of that entity, for example as a result of further significant deterioration in its Russian and Ukrainian
activities; (2) substantial additional credit charges beyond those currently expected; (3) an extended period of
declining earnings and internal capital generation; and/or (4) a decline in capitalisation and regulatory capital.
A downgrade to RBI's and RZB's long-term ratings could result from (1) a weakening of RBI's intrinsic financial
strength; (2) the lack of a credible capital strengthening plan for the 'Raiffeisen' sector in Austria and the potential
impact on RBI; and (3) a decline in the prospects for systemic support in Austria and in the EU, in light of
developments associated with resolution mechanisms and burden-sharing for European banks.
DETAILED RATING CONSIDERATIONS
ONGOING CAPITAL PRESSURES TRIGGERED STRATEGIC REVIEW
On 9 February 2015, RBI announced a strategic review program that highlights the bank's ongoing capital
pressures and prompted to bank to downsize and/or dispose important and sizeable parts of its operations. While
all of these measures are focused on fostering capital buffers, we believe that the announced measures bear
execution risk during its implementation period until end-2017 and, therefore, will only benefit the bank's
capitalisation over the medium term. As a result, the group remains vulnerable to downside risk and volatility in key
markets in CEE and CIS.
RBI's strategic review program will significantly restructure and deleverage its broad and diversified franchise
across 15 countries in CEE/CIS as demonstrated by the anticipated reduction of RWA in the order of EUR 26
billion in until end-2017, representing almost 33% of its end-September 2014. Amongst others, the measures
include the disposal of RBI's Polish subsidiary, the rescaling and exit of Asian and US bank activities, as well as a
further rescaling of the Austrian bank's Russian and Ukrainian exposures.
Persistent tailwinds from its operations in Russia and Ukraine in particular have led the bank to announce a set of
significant medium-term restructuring measures that are intended to reduces risk-weighted assets (RWA) by EUR
26 billion until end-2017, representing almost 33% of its end-September 2014 RWA. A series of management
actions during Q4 2014 already helped to reduce RBI's RWA by almost EUR10 billion and partly offset the effects
of the significant deterioration of the Russian rouble against major currencies before year-end. As a result, RBI's
transitional Basel III common equity Tier 1 (CET1) ratio remained largely unchanged at 10.9% as of end-2014
compared to 11.0% at end-September 2014.
The adverse change in the operating environment has significant negative implications for the capitalisation and
earnings power of RBI, and, because of its importance to RBG, also reduces the Group's ability to provide support
for its member banks. In addition, RZB's owners are affected by the recent developments in Russia as they
reduce RBI's value and its ability to pay dividends to its shareholders.
We consider RBI's current capital base only sufficient in a mild downturn. Following the bank's EUR 2.78 billion
capital increase in January 2014, RBI's core capitalization is now more in line with that of its peers. However, as a
result of its significant exposures in CEE and CIS, RBI exhibits rising tail risks, which may require additional
capital strengthening.
In June 2014, RBI returned EUR 1.75 billion of participation capital that the Austrian government injected into the
bank during the financial crisis. The repayment of EUR 750 million private investors participation capital in
September (including a EUR 250 million tranche from its parent bank RZB) further diminished RBI's overall loss
absorption capacity albeit it does not affect its regulatory fully loaded CET1 capital ratio, which RBI had reported at
10.0% at end- 2014.
RBI's parent institution, RZB, passed the ECB's comprehensive assessment (CA), including the adverse stress
test scenario that showed a CET1 ratio of 7.8% (compared to minimum requirement of 5.5%) translating into a
capital buffer of EUR 2.1 billion for 2016. For RZB, the asset quality review (AQR), which preceded the stress test,
also revealed an adjustment to capital of EUR 753 million or 65bp compared to a CET1 ratio that the CA reported
at 10.36% for year-end 2013.
We have adjusted RBI's Capital score in our scorecard to ba3 to reflect the bank's ongoing capital pressures.
CONTINUED PRESSURE ON RBI'S ASSET QUALITY IN CEE/CIS
At end-September 2014, RBI's non-performing loans (NPL) were EUR 9.2 billion, an increase of 6.3% compared to
EUR 8.6 billion at year-end 2013 translating into an NPL ratio of 11.1% (2013: 10.7%). Based on preliminary yearend 2014 data, RBI's NPL ratio was 11.2%. We expect overall further rising loan-loss-provisions across RBIs
portfolios and the revaluation of intangible assets at its Ukrainian subsidiary Raiffeisen Bank Aval (domestic
deposits Caa2 negative, BCA caa3), as well as higher costs related to foreign currency loans in Hungary. For
2014, RBI reported preliminary loan-loss-provisions (LLP) of EUR 1.7 billion, compared to EUR 1.1 billion in 2013.
At year-end 2014, RBI's coverage ratio slightly improved to 67.9% (2013: 63.1%).
At end-September 2014 and relative to RBI's EUR 8.7 billion net Tier 1 capital (i.e., after regulatory deductions)
and loan loss reserves (EUR 6.1 billion), the bank's risk profile continues to reflect its sizeable risk appetite in, and
exposures to Eastern Europe. At this time, the corporates segment accounted for the majority (48%) of RBI's total
(EUR 166.7 billion) credit exposure; the financial institutions segment accounted for 16% of the bank's credit
exposure, and retail clients account for 18%. In terms of geographical distribution, activities in CEE and CIS
dominate the portfolio, with around 60% of the aggregate exposure (Central Europe: 28%, Southeast Europe 15%,
Russia 13%, Other CIS 4%), while Austria (17%) and the EU (14.4%) play a lesser role.
At end-September 2014, the RBI's CEE segments accounted for EUR 7.0 billion or 76% of RBI's total problem
loans.
RESUMPTION OF FULL EARNINGS POTENTIAL REQUIRES FURTHER COST OPTIMISATION AND
RETURN TO LOWER COST OF RISK
We expect that RBI will continue to face significant capital and profit headwind in the years to come, given ongoing
challenges in key markets, including Ukraine and Russia.
Measures announced as part of RBI's strategic review will reduce the banks recurring earnings capacity, for
example as a result of the planning sale of Polish operating, rescaling its US activities, as well as rescaling its
Russian bank activities. Additionally, the rouble devaluation will result in significantly lower euro-denominated
earnings from RBI's Russian operations, a key contributor to its profits. Further, the reshaping of the bank's
business model will be associated with restructuring costs that weaken its earnings capacity during the
implementation phase that goes until end-2017.
While RBI maintained a profitable franchise throughout the global financial crisis, it reported a first-time quarterly
pre-tax loss in Q4 2012 of EUR 77 million as a result of increased loan loss provisions and consolidation effects
from Polbank. In 2013, RBI reported pre-tax profits of EUR 835 million, which is slightly below the EUR 846 million
reported for 2012 (adjusted for EUR 269 million one-time profits from the sale of a securities portfolio and a
buyback of hybrid bonds). On 9 February 2015, RBI reported a preliminary consolidated net loss of EUR493
million for 2014 that included EUR306 million goodwill impairments and EUR196 million deferred tax assets writedowns. Excluding both items, RBI would have reported a more balanced preliminary net result for 2014.
VULNERABILITY DUE TO SOME DEGREE OF WHOLESALE FUNDING
RBI benefits from a deposit-rich balance sheet, with customer deposits accounting for 54.2% of total assets at
end-2014 (based on preliminary 2014 financials). RBI increased its deposit base by almost EUR 10 billion in 2011
and maintained a deposit base of around EUR 66 billion since then. At end-2014, RBI's loan-to-deposit ratio was
118% (2013: 121%) indicates some wholesale funding dependence, in particular at the holding level. Short-term
funding and medium- and long-term funding together account for 36% of RBI's funding base, and hence capital
markets access forms an integral part of and is a prerequisite for RBI's funding strategy. The bank faces
upcoming maturities of EUR 2.7 billion per annum for 2015.
The network banks' funding dependence on the Austrian holding company is limited for new business
underwritten, with some funding being made available to Poland, Hungary and Slovenia. Excluding long-term funds
and loans funded by development banks, RBI's network banks in CEE show loans-to-local-stable-funding ratios of
less than 110%, except for Slovenia (123%). The Austrian regulator recommends a target of 110% in new
business (Austrian finish).
Notching Considerations
AFFILIATE SUPPORT
We consider the likelihood of support from RBG, the Austrian Raiffeisen sector, to be very high due to RBI's
strategic importance to the sector. This support materially reduces the probability of default as the co-operative
group cross-sector support mechanism aims to stabilise its members by avoiding any form of loss-participation by
creditors, or bail-in. Cross-sector support currently provides two notches of rating uplift to RBI's and RZB's debt,
deposit and subordinated instrument ratings, leading to RBI's ba1 Adjusted BCA.
However, during the review period, we will re-assess RBG's ability and willingness to provide capital support to all
of its Group members, including RBI, in an adverse scenario. We consider the Group's capitalisation as moderate
relative to RBG's overall credit profile, which is focused on, and therefore strongly correlated with its higher-risk
CEE/CIS operations housed at RBI. To protect RBG against likely losses under an adverse scenario, comfortable
capital resources above minimum requirements would be required.
RZB operates as a holding company for the sector's major financial subsidiaries, in particular RBI. RZB owns
60.7% of RBI's shares and generates a very large percentage of its pre-tax earnings from RBI's banking activities.
The remainder results from RZB's low-margin/low-risk operations as the Austrian primary Raiffeisen banks' and
Raiffeisenlandesbanks' central institution, the co-operative sector's leasing activities in Austria and CEE, and its
31.4% equity stake in the sector's insurance company UNIQA (unrated). As a result, we consider RZB's risk
profile to be closely aligned with that of RBI.
LOSS GIVEN FAILURE
RZB is subject to the EU Bank Resolution and Recovery Directive, which we consider to be an Operational
Resolution Regime. We expect RBI to be included in the resolution perimeter of its parent entity RZB and in
accordance with our methodology, we therefore apply RZB's LGF analysis, considering the risks faced by the
different debt and deposit classes across the liability structure at failure. We assume residual tangible common
equity of 3% and losses post-failure of 8% of tangible banking assets, a 25% run-off in "junior" wholesale deposits,
a 5% run-off in preferred deposits, and assign a 25% probability to deposits being preferred to senior unsecured
debt. These are in line with our standard assumptions.
Our LGF analysis for RZB indicates a loss-given-failure for deposits and senior unsecured debt that leads us to
expect to position the Preliminary Rating Assessment two or more notches above RBI's Adjusted BCA. This is
supported by the substantial senior debt and subordinated debt volume.
GOVERNMENT SUPPORT
The implementation of the BRRD in Austria has caused us to reconsider the potential for government support to
benefit certain creditors. We are considering to fully exclude government support from RBI's and RZB's ratings,
despite the banks' substantial size, strong national market shares and systemic relevance to the country's
banking system. This reflects recent developments in the Austria banking market, in particular the authorities'
decisions not to no honour Carinthia- state-guaranteed senior obligations of Heta Asset Resolution AG (rated Ca
negative).
About Moody's Bank Scorecard
Our Scorecard is designed to capture, express and explain in summary form our Rating Committee's judgment.
When read in conjunction with our research, a fulsome presentation of our judgment is expressed. As a result, the
output of our Scorecard may materially differ from that suggested by raw data alone (though it has been calibrated
to avoid the frequent need for strong divergence). The Scorecard output and the individual scores are discussed in
rating committees and may be adjusted up or down to reflect conditions specific to each rated entity.
Rating Factors
Raiffeisen Bank International AG
Macro Factors
Weighted Macro Profile
Financial Profile
Factor
Moderate +
Historic Ratio
Macro
Adjusted
Score
Credit Trend
Assigned
Score
Key driver #1
11.1%
b2
←→
b2
Geographical
concentration
10.3%
ba2
↓
ba3
Expected
trend
0.3%
b1
↑
ba3
Expected
trend
Solvency
Asset Risk
Problem Loans / Gross
Loans
Capital
TCE / RWA
Profitability
Net Income / Tangible
Assets
Combined Solvency
Score
Liquidity
Funding Structure
Market Funds /
Tangible Banking
Assets
b1
b1
34.9%
ba3
↑
ba2
Market funding
quality
28.7%
baa2
↑↑
a3
Stock of liquid
assets
Liquid Resources
Liquid Banking Assets /
Tangible Banking
Key driver #2
Assets
Combined Liquidity
Score
ba1
baa3
Financial Profile
ba3
Qualitative Adjustments
Adjustment
Business
Diversification
Opacity and
Complexity
Corporate Behavior
0
Total Qualitative
Adjustments
0
0
0
Sovereign or Affiliate
constraint
Aaa
Scorecard Calculated
BCA range
ba2 - b1
Assigned BCA
ba3
--
Affiliate Support
notching
Adjusted BCA
Instrument Class
ba1 Possible
Downgrade
Loss Given Additional Preliminary
Failure
notching
Rating
notching
Assessment
Government Local Currency
Foreign
Support
rating
Currency rating
notching
Deposits
--
--
--
--
Senior unsecured bank
debt
Dated subordinated
bank debt
--
--
--
--
--
--
--
--
Baa2 RUR
Uncertain
Baa2 RUR
Uncertain
Ba2 RUR
Possible
Downgrade
Baa2 RUR
Uncertain
Baa2 RUR
Uncertain
Ba2 RUR
Possible
Downgrade
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