Equity 10 April 2013, 12:34pm

Raiffeisen Hungary incurs EUR 174 million loss in 2012

Portfolio

Raiffeisen Bank International (RBI) has on Tuesday published its 2012 annual report on Wednesday. As the bank released its key figures already on 20 February (therefore these are unlikely to cause any surprise), some of the details, e.g. about the performance of the Hungarian subsidiary, make today’s report worthy of a closer look. The Hungarian unit of RBI incurred HUF 50 billion losses and the ratio of its non-performing loans grew to 28.1% last year.

In line with its 20 February release, Raiffeisen Bank International posted the following key figures in 2012:

Net interest income dropped by 5.3% yr/yr to EUR 3,472 million (2011: EUR 3,667 million)
Operating income (excluding goodwill impairment) down by 6.1% to EUR 5,140 million (2011: EUR 5,475 million)
General administrative expenses rose by 4.6% to EUR 3,264 million (2011: EUR 3,120 million)
Net provisioning for impairment losses declined by 5.1% to EUR 1,009 million (2011: EUR 1,064 million)
Profit before tax decreased by 24.9% to EUR 1,032 million (2011: EUR 1,373 million)
Consolidated profit decreased by 25% to EUR 725 million (2011: EUR 968 million)
Non-performing loan ratio increased to 9.8% (up 1.2 percentage points compared to year-end 2011)
Core tier 1 ratio (total risk) increased to 10.7% (up 1.6 percentage points compared to year-end 2011)
Earnings per share decreased by EUR 1.25 to EUR 2.70 from EUR 3.95 for 2011

The fourth quarter of 2012 posed larger challenges for the group, RBI said earlier. Net financial results totalled EUR 266 million in the January-September period, but Q4 had no positive contribution to group profits, the statement said.

One of the reasons of that is that due to IFRS regulations RBI accounted EUR 30 m in Q4 due to the credit valuation adjustments (CVA).

What is CVA?

Credit value adjustment (CVA) is the difference between the risk-free portfolio value and the true portfolio value that takes into account the possibility of a counterparty’s default. In other words, CVA is the market value of counterparty credit risk.

In the view of leading investment banks, CVA is essentially an activity carried out by both finance and a trading desk in the Front Office. Tier 1 banks either already generate counterparty EPE and ENE (expected positive/negative exposure) under the ownership of the CVA desk (although this often has another name) or plan to do so. Whilst a CVA platform is based on an exposure measurement platform, the solution drivers are very different and it is unwise to create dependencies between the risk exposure management system and front office CVA system, even if they share similar intermediate outputs. (Source: Wikipedia)

The Hungarian subsidiary incurred EUR 174 million losses in 2012, according to parent company figures, against EUR 355 m loss recorded in 2011. 44% or EUR 77 m of the EUR 174 m loss (HUF 50.7 bn at end-2012 EUR/HUF exchange rate) were generated in the fourth quarter.

In Hungary, net provisioning for impairment losses decreased by half to EUR 241 million year-on-year (2011: EUR 478 million). Net interest margin fell 44 basis points to 3.43% and net income decreased EUR 7 million due to declines in volume.

The unit’s loan-to-deposit ratio fell to 106.2% last year from 121.5% at end-2011. Its loans to customers declined by 6% yr/yr to EUR 5,231 m, whereas its deposits grew by 7.6% to EUR 4,927 m. The bank’s cost/income ratio was extremely high at 90.4%, which compares with 58.1% a year earlier.

The ratio of non-performing loans also grew to an exceptionally high level of 28.1% from 22.7%, whereas NPL coverage remained largely flat. The number of Raiffeisen branches in Hungary was cut by nine in 2012.

“Hungary is a special case, economically and above all politically. It will be very difficult for the current government to overcome its self-imposed exile and find its way back into the middle of Europe. With regard to provisions for impairment losses, 2012 was clearly better for us than the previous year because of the mandated loan conversions necessitating enormously large provisioning. However, the overall level of provisioning is naturally still a source of pain. Immediately after the crisis began, we implemented an entire set of measures to adjust our costs to the new business environment, including a staff reduction of about one fourth of the peak level in 2008 to below 3,000 employees. However, we had high profits in Hungary over the years, which helped us to partially offset the losses from the 1998 crisis in Russia. Today, Russia generates enough profit to more than offset the losses in Hungary," RBI said in its annual report.