A bank which is neither focused on mergers and acquisition services, nor risky trading, nor riskless asset management, earns its money based on the interest rate differential between what it pays to its depositors and the money it charges its borrowers.
This means we are living in good times for classical bank business. When interest rates are relentlessly rising, as they are now, banks tend to pay much less to their savers and current account holders than they charge for lending out money.
If we had invested in boring commercial banks before the inflation tide came in with a roar last year, we may not have earned a killing, but we wouldn’t have lost out in the stock market rout either.
A good example is the UK mortgage lender Lloyds Bank. Its share price is certainly a far cry from the 1990s, when it was 10 times higher than today, but in the last year it returned almost five per cent, neither dented by the war in Ukraine, nor by the steady deterioration of the real estate market.
When it comes to boring commercial banks, the sleepy Austrian Raiffeisen Bank International (RBI) apparently beats them all. When it presented its annual report for 2022 in February, it boasted group earnings of €6.2 billion. Not quite the €7.9 billion of 2021, yet still remarkable. Its share price fell almost five per cent when the news broke.
What shocked the market was the bank’s admission that half of its income was achieved with its Russian operations, which boasted a return on equity (ROE) of 97 per cent, as the Neue Zuercher Zeitung (NZZ) reported from the press conference.
Now the Austrians are well known for harbouring dubious sympathies for Russia. But even in its home country, Raiffeisen’s results were a slap in the face of prevailing political values. While everyone, from McDonald’s to ExxonMobil had left in a rush, these farmer bankers were raking it in big time in warmongering Russia.
Raiffeisen, having successfully expanded into former Eastern Europe, Russia and Ukraine since the fall of the Iron Curtain, has acquired quite some expertise over the years operating in a less than clear-cut environment. It was still surprising when it reported positive results even from war-torn Ukraine, with an ROE of 19.5 per cent (NZZ).
Leaving the evil smell aside, both results, in Ukraine and Russia, are misleading and more the result of accounting mirages than anything else. In Ukraine, everything and everyone is living on borrowed time: its exchange rate, its borrowers, Raiffeisen’s office workers and even the buildings that house its branches.
How long Ukrainian customers will find it agreeable to bank with a financial institution that operates so outrageously successfully in Russia is another risk worth considering.
Soon, losses or more realistic loss provisions will reveal the bank’s underlying precariousness.
Russia is a separate case altogether. To operate a Western bank in Russia is not illegal. None of today’s sanctions would be violated. But it is morally repugnant and causes terrible reputational damage. Leaving, therefore, makes commercial sense too.
Raiffeisen is not alone in this predicament. Citigroup, ING, UniCredit and Deutsche Bank are among the 45 Western banks which still maintain affiliates in Russia. But Raiffeisen is by far the largest bank by assets and earning more than others.
To operate a Western bank in Russia is not illegal. But it is morally repugnant- Andreas Weitzer
Simple logic suggests three exit routes: to sell out to a willing buyer; to run down the business to zero; or to cancel all customer contracts, fire all employees and leave a legal mess behind. All three options are more difficult than they look at first glance. To leave the keys on the desk and abscond would open Raiffeisen to all kinds of lawsuits.
Aggrieved customers and employees might rightfully sue for damages. To find a buyer will be tricky. Western peers will not volunteer. Local oligarchs will drive a shameless bargain. And even if Raiffeisen would wholeheartedly agree to sell for a mere token value, any transfer of Western ownership would demand the written consent of President Putin. Good luck with that. It would be ridiculous to even try.
I have sued a defaulting borrower in Russia for more than six years, from district courts to the Supreme Court and back again. When I finally succeeded and was awarded a very generous compensation, it turned out that the only account that would ever receive my money is an account ‘Type C’ in Russia – an account that is limited to paying Russian taxes, Russian fines and Russian salaries.
So even if a Western bank would have been willing to accept the repayment of my stale Russian claims ‒ which is a big question mark as most western banks refuse to handle even perfectly legal money transfers ‒ Russian authorities would not let me do so.
The third option ‒ to tighten the screws on customers with excessive fees and extortionate charges in order to make them go away, have been tried by Raiffeisen without much success. However much it charged its customers they still preferred to keep on banking with a Western institution, considering them more trustworthy than local alternatives.
This, and the artificially high ruble exchange rate, boosted by sharply reduced imports, explains the enormous profits of Raiffeisen Moscow, constituting exactly half of the group’s total earnings, at home and abroad.
Raiffeisen’s disgraceful profitability in Russia is, after all, a mirage. All winnings have to remain in the country, not a single euro can ever be repatriated. Like me, they are stuck with something like my account ‘C’. Such is the current Russian law. The group’s results, as much as they may make sense for mere accounting purposes, are therefore more imagined than real.
How CEO Johann Strobl can claim that a full write-down of the Russian operations will reduce RBI’s capital ratio by merely two per cent to 14 per cent is hard to decode. According to Bloomberg UK, it has assets of €207 billion against €188.5 billion liabilities. If one deducts Russia, Ukraine, and all the former Eastern Bloc countries which used to thrive on business with Russia, not much is left. Raiffeisen has come to the end of the line. It is stuck with zero options.
There’s a higher justice to this. For many years its Vienna headquarters were proud caterers to even the most dubious of Russian oligarchs, with quite flexible compliance ideas. RBI has a knack for shortcuts too. Like all other European banks, they lied during the Great Financial Crisis, pretending to be liquid when in fact they had run completely dry.
On other occasions, when troubled at the end of a tax year by insufficient capital ratios it used to swap parts of its loan portfolio with a better padded local bank, just over the last day of the financial year and then back again.
Its board members are often political appointees, not hardened bankers. This explains their optimism ‒ an optimism that is not shared by the markets. While still comfortably afloat, Raiffeisen trades at a book value of 0.32. This translates as follows: when all assets are correctly evaluated and added up, they will be worth less than a third of the bank’s current market value. This sounds about right.
Andreas Weitzer is an independent journalist based in Malta.
The purpose of this column is to broaden readers’ general financial knowledge and it should not be interpreted as presenting investment advice, or advice on the buying and selling of financial products.
andreas.weitzer@timesofmalta.com