Emerging Europe's No 2 lender Raiffeisen International stayed profitable in the second quarter as cost cuts helped offset a revenue decline and a sharp rise in bad debt, particularly in Ukraine. Net profit dropped 60 percent on the quarter, and 93 percent year on year, to 22 million euros ($31 million) as the bank, highly geared towards crisis-ridden Ukraine, Russia and Hungary, saw bad debt rise by a third to 6.8 percent of its loan book.
Central and Eastern Europe's economies are expected to decline sharply this year as exports to western Europe dwindle and capital inflows dry up, putting under pressure the mostly western owned banks in the region. Raiffeisen's sharp earnings decline stands out among peers in the region such as UniCredit or Erste Group, which are less exposed to the more risky countries and mostly beat forecasts and were able to slow down, and sometimes reverse, the earnings decline in the second quarter.
Interest income, Raiffeisen's main revenue source, dropped 5 percent on the quarter, while fee income declined by 1 percent, both missing market expectations. Trading profit rose strongly as it did for other banks in the region. "Despite being a touch better than expected on the bottom line, operating performance was relatively weak while pressure on the asset quality was slightly bigger than we thought," brokerage Wood & Co said in a note to clients.
Raiffeisen could offset part of the revenue hit by taking a large axe to costs. Operating costs declined on the quarter, against market expectations for a rise, and the bank said job cuts would continue on top of the 4,000 slashed since October. While European bank stocks were buoyed by good news on the US and German economies, Raiffeisen shares fell early in the session though they later turned positive and traded up 1 percent at 35.36 euros by 0946 GMT.
Analyst forecasts in a Reuters poll for net profit had averaged 17 million euros but varied widely between a 22 million euro net loss and a 82 million euro profit, reflecting poor visibility especially in Ukraine, Russia and on the Balkans. Bad debt at Raiffeisen surged by a third to a whopping 18.2 percent of all loans in Ukraine, whose economy is on track to shrink 14 to 15 percent this year as it survives on an lifeline from the International Monetary Fund.
A 55 percent rise in non-performing corporate debt pushed Raiffeisen's risk provisions up 18 percent on the quarter, to almost five times the level of last year. But similar to other banks in the region, the rise did not keep up with the surge of new bad debt, driving down the ratio of risk provisions to non-performing loans to 69 percent.
Many banks in emerging Europe are trying to smooth out the rise in bad debt by running down these ratios - an implicit bet that loans will stop turning sour before banks have used up the money set aside to cover them, analysts say. Most analysts expect bad loans to keep rising well into next year.
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