Raiffeisen Bank International: Another buy, Russian assets deemed worthless (RAIFF)

(Note: All amounts in the article are in EUR. At the current exchange rate, 1 EUR is around $1.11. Per share figures refer to the ticker RAIFF.)

Investment Thesis

Despite its Russian troubles, Raiffeisen Bank International (OTCPK:RAIFF) (OTCPK:RAIFY)) (abbreviated: RBI) has outperformed other European banks (as measured by the EURO STOXX Banks (SX7E) index) over the past year. Performance was below its Austrian peers Erste Bank (OTCPK:EBKDY) (OTCPK:EBKOF) and the BAWAG Group (OTCPK:BWAGF).

There are two sides to the RBI investor story: one where it is a significantly undervalued financial institution with a P/B ratio of 30% and a P/E ratio (based on 2024 earnings estimates) of 2.2. Unfortunately, 1/3 of the book value and almost 1/2 of the earnings are in Russia and the bank can’t access it either. If (and this is a big “If”) the bank could only get its hands on its money in Russia, it would extremely underrated. The other investor story is that Russian assets are worthless and the RBI should be valued only by its remaining assets (in Austria and Central and Eastern Europe) and the return on those assets.

In this article, I will focus on the second version – how the RBI should be valued without its Russian (and Belarusian) assets. This is now a fairly likely scenario. I also exclude Belarusian assets for convenience, not political reasons. The Belarusian branch is separate from the Russian branch, but the RBI does not report all the numbers separately. The Belarusian branch is relatively small with only €2.7 billion in assets (1.3% of the total), so it doesn’t make that much of a difference.

The RBI management has been trying hard for the past two years to access the billions of profits trapped in Russia, but without success. An almost desperate scheme the bank tried was to exchange its Russian subsidiary for assets of the defunct Sberbank Europe which, again due to sanctions, cannot be transferred to Russia. This ran afoul of US sanctions restrictions and the bank was forced to abandon the plan. On September 6, the bank announced that a Russian court had issued a preliminary injunction banning the transfer of shares in its Russian subsidiary AO Raiffeisenbank Russia. The consequence is that the RBI cannot (or does) sell them. The bank is stuck in limbo, with the ECB on the one hand criticizing it for doing too much business in Russia, and Russia not letting it go (Raiffeisenbank Russia is one of the few payment gateways left outside of Russia).

So what does the bank look like financially without Russia?

Financial results S1/Q2 2024

While most financial results and balance sheet KPIs are significantly lower and worse without RU/BY, it turns out that RBI doesn’t fare too badly without them either.

(Note – all following numbers exclude RU/BY.)

The bank increased its profit in the first half of 2024 by 21% compared to last year, up to EUR 604 million. Return on equity (after tax) was 9.1%. That’s not great as such (although an improvement from 7.6% a year ago), but given that the stock trades on a low P/B ratio of 43.3%, even though Russian assets are discarded, the low RoE appears to be valued, with plenty of room up. The CET1 ratio was a comfortable 14.7% against a regulatory requirement of 11.8%.

I would say the bank is over capitalized. This (partially) explains the lower RoE and could be the basis for future share buybacks. However, I don’t expect any share buybacks to happen before the Russian situation is finally resolved, and that may take a while.

Core revenue rose 6% year-on-year to €3.042 billion, while OPEX rose just 5%. So the cost/income ratio fell by 0.1 percentage points to 49.7%. While not best in class (which would be its Austrian peer, BAWAG Group, in my opinion, barely over 30%), I consider a cost/income ratio of 49.7 not bad.

The cost of risk was moderate at 32 bps due to low insolvencies and delinquencies, with the NPE ratio at a healthy 1.9%. This includes an additional €282 million provision for foreign currency mortgage disputes in Poland, where the subsidiary is in impairment. In H1 2023, the cost of risk was 25 bps.

Guide 2024

The bank’s guidance for 2024 hasn’t changed much since the start of the year. The bank estimates underlying revenues of 5.9 billion, OPEX of approximately €3.3 billion, risk costs of approximately 35 bp and a consolidated return on equity of approximately 10%.

These numbers are solid, but not spectacular. In particular, profitability – although up from 7.6% in 2023 – is behind most of its European peers (perhaps excluding Germany) and Austria. The best comparison is probably Erste Bank Group, which also has significant business in Austria and the CEE region (although there is not a 100% overlap). Erste Bank Group had a RoE of 16.1% in H1 2024 and a CET1 ratio of 15.5%, easily beating RBI. However, the assessment is different. Erste Bank trades at a price-to-book ratio of over 70% (which seems low in terms of profitability) compared to 43% for Raiffeisen Bank International.

ASSESSMENT

Therefore, the investment thesis (and Buy recommendation) is based on 1) the relatively low valuation which should normalize over time and 2) the high and sustainable dividend yield.

I think RBI should be trading at a 50-60% price/book ratio, which gives us about a 30% edge in the middle of that range. However, the unresolved situation in Russia will likely hang over the share price and prevent a significant re-rating. So that reassessment may take time. Meanwhile, investors are rewarded with a substantial and sustainable dividend.

RBI paid a dividend of €1.25 for 2023 (the bank has a dividend payment per year, usually paid in April after the annual general meeting). There is a chance that the RBI will increase the dividend, but I suggest that investors are conservative and assume a stable dividend for 2024. At the current share price of €16.7, the dividend yield is 7.5%, certainly not bad, especially with falling interest rates. .

risks

Given the situation in Russia, the main risk is macroeconomic development, especially in Central and South-Eastern Europe. Gradual disinflation is progressing in the region, but negative surprises cannot be ruled out. The RBI expects growth in CEE to outpace the eurozone, with growth between around 2.5% in 2024 and 2.9% in 2025 (vs. 0.8% and 1.5% for the eurozone).

Conclusion

When valuing Raiffeisen Bank International, investors should now assume that the Russian assets, which represent 1/3 of book value and almost 1/2 of profit, are worthless and the bank will not be able to recover its assets. This scenario has been looming over the RBI for some time and the market has priced in, which means that Raiffeisen Bank International is still cheap, with a price-to-book ratio of 43%, a price-to-earnings ratio of 4.4 and a dividend yield of over 7%.

Editor’s Note: This article discusses one or more securities that are not traded on a major US exchange. Please be aware of the risks associated with these stocks.