Heard on the Street
Switzerland and Russia Make Raiffeisen No Bargain
Swiss Franc Turmoil Adds to Threat From Russian Exposures
By Paul J. Davies
Jan. 19, 2015 5:43 a.m. ET
The ripples continue to spread from the splash made last week by the Swiss National Bank ’s shock change in currency policy.
Beyond UBS and Credit Suisse , Switzerland’s two biggest banks, the European bank stock hurt most by the move was Austria’s Raiffeisen Bank International . It is among lenders who fed demand for Swiss-franc-denominated home loans from Central and Eastern European borrowers seeking an alternative to higher-coupon products in their own currencies. Its domestic rival Erste Bank also made such loans, but did so mostly within Austria.
The problem now is that the near 20% strengthening of the Swiss Franc has made repayments for Central and Eastern European borrowers significantly higher in local currency terms. That is likely to increase bad loans for the banks.
Erste’s €6.9 billion ($7.98 billion) of Swiss-franc denominated loans are equivalent to 82% of its tangible book value, according to Berenberg. So a big uptick in defaults would be very painful.
And the currency move has already hurt Erste’s capital because a stronger Swiss franc increases the value of the loans in euro terms on its balance sheet. This lifts risk-weighted assets and cuts into its core capital ratio, although only by about 0.1%.
Raiffeisen has fewer loans at €4.4 billion at Friday’s exchange rate. But most of these are in Poland with smaller exposures in Romania, Croatia and Serbia. This is still equivalent to 53% of tangible book value forecast for its 2014 results by Citi. The bank also had €700 million worth of such loans in Hungary at the end of the third quarter, however, the central bank there pledged last year to convert all local Swiss franc loans into Hungarian Forint next month, in effect hedging that exposure.
But Raiffeisen is also hugely exposed to Russia, where the tumbling ruble and pressure on the economy from declining oil revenues is raising default risks. Russia accounted for 13% of the bank’s total loan book at the end of September. That is equivalent to 260% of 2014 tangible book value.
This month Raiffeisen warned it may have to write down some of its €148 million of goodwill in Russia. However, it said this wouldn’t affect its capital base or hurt profits from Russia for the year, expected to be “significantly above €300 million” after tax, or about half of group profits.
Given the size of its Russian exposure, though, goodwill is the least of the bank’s worries.
Raiffeisen’s shares are down more than 60% since last summer and trade at 0.35 times Citi’s tangible book value forecast. But bargain hunters should beware: until Russia and the Swiss Franc stabilize they could easily get burned.
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