Cablegate: Consolidation Looming at Raiffeisen Group

VZCZCXRO3284
PP RUEHIK
DE RUEHVI #0210 0561431
ZNR UUUUU ZZH
P 251431Z FEB 10
FM AMEMBASSY VIENNA
TO RUEHC/SECSTATE WASHDC PRIORITY 4230
RUEATRS/DEPT OF TREASURY WASHDC PRIORITY
INFO RUCNMEM/EU MEMBER STATES
RUCNEEC/EASTERN EUROPEAN COUNTRIES COLLECTIVE

UNCLAS VIENNA 000210

SIPDIS, SENSITIVE

TREASURY FOR OASIA/ICB/MAIER, NORTON, FTAT, OCC/SIEGEL TREASURY PASS
TO FEDERAL RESERVE and SEC/E. JACOBS

E.O. 12958: N/A
TAGS: EFIN AU
SUBJECT: Consolidation Looming at Raiffeisen Group

REF: A) 09 VIENNA 828; B) 09 VIENNA 642

Sensitive but unclassified: Protect accordingly.

1. (SBU) SUMMARY: As markets await final 2009 results, consolidation
rumors surround Raiffeisen International (RI) -- the second largest
lender in eastern Europe and a listed subsidiary of RZB/Raiffeisen
Zentralbank (Austria's third largest banking group). RI will likely
report an 80% drop in profits, with loan losses more than doubling.
Parent RZB may reintegrate Raiffeisen to cut costs and give the
group better access to capital markets, essential to pay back state
aid and meet higher equity requirements. Privately, Raiffeisen
leadership say the move also offer an opportunity for cost-cutting.
Investors panned the move, with RI's share price falling steeply.
END SUMMARY.

Background on Raiffeisen International (RI)
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2. (U) A leading player in central/eastern Europe and the former
Soviet Union (CEE/FSU), RI is a fully consolidated subsidiary of RZB
-- i.e. on RZB's balance sheet. Since April 2005, RI has been
listed on the Vienna Stock Exchange, with RZB holding 70% of RI,
institutional investors 20% and private investors 10%. The RI
network comprises 15 subsidiary banks and numerous finance and
leasing companies with a combined 3,100 branches and outlets, 15
million customers and 59,000 employees in 17 markets (Albania,
Belarus, Bosnia-Herzegovina, Bulgaria, Croatia, Czech Republic,
Hungary, Kazakhstan, Kosovo, Moldova, Poland, Romania, Russia,
Serbia, Slovakia, Slovenia and Ukraine).

3. (U) Raiffeisen International has no overall banking license; it
is organized as an RZB holding company, with RZB holding the
Austrian banking license. For this reason, RI could not receive
equity from the GoA bank rescue package directly. In August 2009,
RZB strengthened RI's capital base by giving it EUR 1.25 billion in
fresh equity (EUR 600 million in non-voting participation rights and
650 million in hybrid Tier 1 capital) without changing RI's
shareholder structure. RZB -- itself largely owned and controlled
by a network of provincial Raiffeisen banks -- strengthened its own
capital base by EUR 2.5 billion in 2009 (drawing EUR 1.75 billion
from the GoA's state equity pot and raising EUR 750 million in
participation capital from existing shareholders). RZB's Tier 1
capital ratio was 9.2% at the most recent reporting data (30
September 2009).

Preliminary 2009 Results
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4. (U) On February 22, Raiffeisen International (RI) disclosed that
it was hard hit by the CESEE recession last year and expects a
consolidated profit (after minority interest) of just c. EUR 212
million, down 78% from EUR 982 million in 2008. Loan loss
provisioning more than doubled to EUR 1.74 billion (from EUR 780
million in 2008). Other preliminary results for 2009: net interest
income EUR 2.9 billion (down 10% from 2008), net fee/commission
income EUR 1.2 billion (down 18%), loans and advances to customers
EUR 50.5 billion (down 9%), customer deposits EUR 42.6 billion (down
4%), balance sheet total EUR 76.3 billion (down 11%).

Raiffeisen Group Prospects
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5. (U) In response to a Reuters report, RZB acknowledged February 22
that it is looking for long-term solutions to RI's waning
performance, including a possible re-integration of RI into RZB.
RZB has reportedly hired McKinsey to study various options, but no
decisions have been made. Markets responded very negatively to the
news, with Raiffeisen International's falling by 12% the following
day (its steepest one-day drop since March 2009).

COMMENT
- - - -

6. (SBU) RZB and the Raiffeisen Group are under pressure to raise
capital to repay GoA funds and meet stricter equity standards, since
a reported EUR 800 million of RZB's equity is in hybrid bonds that
may not count as Tier 1 capital under proposed Basel 3 rules. RZB
CEO Walter Rothensteiner told the Ambassador February 24 that
reintegrating RI into RZB (disclosed prematurely due to media leaks)
would give the group better access to capital markets, allowing for
future repayment of capital to the Austrian government, but is also
an opportunity to cut costs (i.e. reduce duplicative staffing) --
something analysts understand well, but a difficult topic to broach
publicly.

EACHO

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