Bancherul - BANCI / ENGLISH / RZB: Strong results and sustained growth

Dynamic growth in the balance sheet total: +15.8 percent
Profit before tax rises 3.9 per cent to € 897 million.
Profit after tax and minority interests down 12.8 per cent to € 393 million
Key indicators: ROE 21.0 per cent, ROA 1.18 per cent, Cost/Income Ratio 54.9 per cent, Risk/Earnings Ratio 11.5 per cent
Market share in Austria increases 1 percentage point to 16.3 per cent
Vigorous growth in Central and Eastern Europe

The Group of Raiffeisen Zentralbank �sterreich AG (RZB) moved forward with its growth strategy in the first half of 2008. Despite difficult conditions for banks, RZB improved its market position in its domestic markets of Austria and Central and Eastern Europe (CEE), said the company in a statement.

The balance sheet total increased by 15.8 per cent, rising to 159.2 billion euros, and the half-year profit before tax rose 3.9 per cent to 878.5 million euros. During the first half of the year, RZB boosted its market share in Austria from 15.3 per cent (end-2007) to 16.3 per cent, measured in terms of the aggregate balance sheet total for the banking sector.

“A key factor behind the success we have achieved at RZB is the strong business in Central and Eastern Europe, as well as excellent results with corporate customers and financial institutions served from Vienna,” noted CEO Walter Rothensteiner.

“Profit from operating activities in the first half of the year was outstanding once again. Even though the turmoil on the financial markets has made conditions very difficult for quite some time now, RZB’s results underline that good strategic positioning can be a key to success,” continued Mr. Rothensteiner.

Strong growth in balance sheet total

RZB sustained the rapid pace of its growth, increasing its Balance sheet total by 15.8 per cent to 159.2 billion euros. In other words, as in prior years, its growth surpassed the average rate of growth of 8.1 per cent (aggregated) for all Austrian banks as reported by Oesterreichische Nationalbank (OeNB).

Business transacted with financial institutions was the biggest contributor to this growth. Loans and advances to banks increased by 43.5 per cent to 44.4 billion euros, while Deposits from banks grew by 19.2 per cent to 58.3 billion euros.

Customer business also grew substantially. Loans and advances to customers increased by 13.4 per cent to 82.9 billion euros, while Deposits from customers grew by 11.5 per cent to 61.7 billion euros. Liabilities evidenced by paper again grew strongly, increasing by 27.6 per cent to 18.7 billion euros.

RZB’s balance sheet total in Austria grew by 20.7 per cent to 70.6 billion euros between the close of 2007 and the end of the period under review. RZB’s growth was also underscored by the 10.9 per cent increase in the balance sheet total of Raiffeisen International to 80.7 billion euros.

Outstanding profit from operating activities

RZB’s high earning power in its operative business persists: Profit from operating activities increased by 24.9 per cent to 1,226 million euros.

The high level of RZB’s earnings from its operations continued to impress. Its Net interest income during the first half of 2008 was 32.0 per cent upon the same period of the previous year at 1,733 million euros. Provisioning for impairment losses grew by nearly the same amount, that is 32.7 per cent. This was reflected by its Net interest income after provisioning, which grew by 31.9 per cent to 1,534 million euros. The Interest margin rose by 15 basis points to 2.34 per cent. RZB’s Net commission income advanced by 20.5 per cent to 843 million euros. Despite falling by 3.6 per cent, its Trading profit remained high, at 106 million euros.

General administrative expenses grew by 23.0 per cent to 1,494 millions euros. Most of the increase was due to rapidly rising costs in Central Europe and the CIS region.

The effects of the financial markets crisis

The US subprime crisis caused lasting turbulence in the international financial markets. Volatility and uncertainty dominated the landscape from mid-2007. Spreads widened considerably and changes in risk perception increased risk premiums. Some categories of security were no longer tradable. Even though RZB had not invested directly in the subprime segment, these developments were mirrored in RZB’s investment portfolio.

Net income from derivatives deteriorated from a loss of 0.4 million euros in the first half of 2007 to a loss of 57 million euros in the period under review. This was, above all, attributable to decreases in the mark-to-market valuations of credit derivatives (CDOs) totalling 84 million euros.

Net income from financial investments turned around from a profit of 0.3 million euros in the first half of 2007 to a loss of 97 million euros in the period under review. This result included decreases of 200 million euros in the mark-to-market valuations of securities in the wake of the financial markets crisis.

In other words, RZB recognized valuation decreases on securities and credit derivatives totalling 284 million euros as a result of the financial markets crisis. However, only a fraction of this total resulted from genuine impairments.

RZB has a transparent reporting policy in this regard. All the securities concerned are measured at market value, with the effect that such changes are recognized in the Income Statement. The lion’s share of the valuation decreases should have reversed by the time these financial instruments mature.

Solid earnings against the background of difficult financial markets

Profit before tax grew by 3.9 per cent to 879 million euros. In comparison, OeNB’s estimate of the Austrian banks’ profit from ordinary activities calculated in accordance with HGB fell by 19.2 per cent.

RZB’s expected burden of Income taxes increased disproportionately in the first half of 2008, rising by 39.5 per cent to 228 million euros. As a result, its Tax ratio increased by 6.6 percentage points to 25.9 per cent.

First-half Consolidated profit (profit less anticipated income tax expense and after minorities) was 18.2 per cent down on the previous year at 393 million euros. This was partly due to the increased tax burden, and Minority interests in profit also increased, by 27.8 per cent. That was largely a reflection of the disproportionately large increase in Raiffeisen International’s profit.

Good ratios

RZB’s Return on equity (ROE) before tax of 21.0 per cent was slightly down on the 22.2 per cent figure recorded for 2007 as a whole. On the other hand, the Group’s Return on assets before tax of 1.18 per cent was 0.1 percentage points better than in 2007. It recorded a Cost/income ratio of 54.9 per cent in the first half of 2008, which was 2.0 percentage points better than in 2007.

A robust own funds position

RZB’s Total own funds increased by 1.6 per cent to 10.5 billion euros during the first half of 2008. Issuances of subordinated bonds and increases in hidden reserves made major contributions. At 30 June 2008, RZB had a satisfactory Excess own funds ratio of 14.4 per cent. There were three main reasons for the decline versus the figure of 37.5 per cent recorded at the end of 2007:

At the end of 2007, RZB’s own funds were strengthened by capital increases at Raiffeisen Zentralbank and Raiffeisen International and a supplementary capital bond. Since these borrowings took place in anticipation of the Group’s forthcoming growth in 2008, the own funds figure at the end of 2007 was above RZB’s long-term target.
In line with the calculation rules that are now applicable (Basel II), RZB’s own funds requirement was higher than when applying the old calculation model (Basel I), with Basel II causing an increase in own funds requirement of about 800 million euros.
The basis of assessment increased by more than the Group’s equity, namely 22.2 per cent. Among other things, this was because earnings recorded during the first half and retained within the enterprise could not yet be counted towards own funds. As a result, RZB’s Own funds ratio of 9.2 per cent at the end of the first half of 2008 was below the comparable year-end figure of 11.0 per cent. 0.5 percentage points of the decrease was attributable to Basel II.

RZB’s Core capital ratio fell accordingly versus the end of 2007, retreating by 1.5 percentage points to 7.3 per cent. Nonetheless, RZB’s overall capital position is robust. Given profit retention at year-end, it will suffice to finance the Group’s medium-term plans.

Staff levels reflect the Group’s expansion

RZB’s highly qualified employees are among its most valuable assets. The extension of the branch network in the CEE region led to renewed growth in the number of staff, increasing the workforce by 5.9 per cent to 64,954 (on a full-time equivalent basis) in the six months ended 30 June 2008.

The workforce grew by 5.9 per cent to 61,538 in the CEE region and by 6.2 per cent to 3,036 in Austria. The average number of RZB staff (full-time equivalents) was 11.7 per cent up on the first half of 2007 at 63,275.

A leading bank in Central and Eastern Europe

RZB is one of the leading banks in the CEE region. At the end of the first half, it had a presence in 17 markets in the region via banking and leasing subsidiaries and numerous specialist companies. Business in the CEE region is conducted mainly via the Network banks, which operate under the umbrella of the listed Raiffeisen International subgroup. On the reporting date, Raiffeisen Zentralbank held a stake of approximately 69 per cent in Raiffeisen International.

Raiffeisen International continued to grow strongly during the first half of 2008, when its balance sheet total increased by 8 billion euros or 10.9 per cent to 80.7 billion euros. At the same time, it posted another record result. Its first-half Profit before tax came to 842.7 million euros, which was 38.9 per cent up on the same period of 2007.

(RZB’s results in its Central Europe, Southeastern Europe and CIS geographical reporting segments do not exactly mirror Raiffeisen International’s profit because, above all, of Raiffeisen Zentralbank’s funding and management costs and the business conducted by other Group-members in the CEE region.)

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The Consolidated Financial Statements of RZB are prepared in conformity with the International Financial Reporting Standards (IFRS). A comprehensive description of the business segments as well as detailed information about the balance-sheet and the P&L statement can be found in the Interim Report 2008. You can access it online: http://www.rzb.at/interimreport-2008. The original German version is available at http://www.rzb.at/zwischenbericht-2008. You will find the semi-annual results of Raiffeisen International at http://www.ri.co.at under Company Info, section "Business Development".