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Posts Tagged ‘financial institutions

RIBH – a bank in Central Eastern Europe prepares for the worst

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RaiffeisenchartMar09                                         RIBH chart Mar. 10, 2009

Raiffeisen International (RIBH) is a bank holding company that does all its business in Central Eastern Europe (CEE). This region was particularly hard hit when the economic crisis stopped capital flows into CEE. The different national economies are still in the grip of a severe contraction, but the worst outcome seems to be averted at least for now.

Economists and financial experts thought financial institutions with strong exposure to CEE could suffer huge losses. If national economies were in danger of defaulting on their balance of payments accounts the only way out would be a steep currency devaluation.

This would drive foreign currency loans into default and financial institutions towards insolvency. Luckily this horror scenario has been avoided so far. Regional currencies have stabilized and the decline of CEE economies has slowed. Though the situation still bears significant risks.

Today Herbert Stepic, CEO of Raiffeisen International (RIBH), presented operative results of his company for the first half of 2009. RIBH about the size of a large regional bank in the US with a balance sheet of about €77 billion does all its business in CEE and therefore serves as litmus test for the credit performance of this part of Europe.

Stepic himself pointed out that the firm was resilient in light of economic headwinds and offered €78 million profit as proof. This was down about 86% from last year mostly on currency effects, a global recession and massive increases in loan loss provisions.

All regions, Central Europe, Southeastern Europe, and Russia reported lower net income and higher provisions. For the first time results were negative for GUS Others (Belarus, Kazakhstan, Ukraine). Provisions were particularly interesting because of continuing concerns about credit quality in CEE countries.

Certainly an increase of 380 percent in provisions for loan losses is nothing to be proud of, total allowance has now reached €2.5 billion, but RIBH seems to deal with the situation which is bad yet not out of control. The continuing involvement from international institutions like the IMF, EU, WB and EBRD has certainly helped to alleviate some of the worst fears for CEE and its major debtors.

RIBH financial highlights in 1H 2009 (vs. 1H08):

  • balance sheet €77.9 billion, down 9% on currency devaluation and lower lending activity
  • Deposits from customers down 4% to €42.3 billion, with corporate down 13% or €2.3 billion
  • ratio of customer loans to deposits up 4% to 127% (from Dec. 31, 2008)
  • shares of own funds (equity plus subordinate capital) at 10% of total assets
  • equity at €6.2 billion, down 5%
  • net trading income increased 29% to €119 million
  • income from investment and pension funds declined €9 million or 44%
  • risk weighted assets corporate €27.7, retail €17.3, total €54.7 billion
  • NPL at 6.8%
  • allowance for impairment losses 2.5 billion, up 52% from Dec 31, 2008
  • loan loss provisions increased to €969 million or 380% from €201 million
  • provisions corporate €386 (45), retail €579 (155), total €969 (201) million
  • total write downs €25.6 million (27.1)
  • loans and advances to banks, money market business €5.25 (4.34) billion
  • direct loans to banks €753 million (3.0 billion)
  • loans and advances to retail customers, credit €24.4 (27.8), money market €7.6 (8.0), mortgage loans €17.4 billion (17.2)
  • deposits with central banks particularly in CEE down 55% to €2.0 billion
  • total derivatives (credit and others) €589 million (€865 million, Dec 31, 2008)
  • derivatives at fair value €555 million (€843 million, Dec 31, 2008)
  • net income from derivatives (including hedge accounting) €19 million (€72 million, Dec 31, 2008)
  • liabilities in the form of derivatives (hedging) €42 million (€51 million, Dec 31, 2008)

RIBH1H09-2RIBH1H09-1

Is CRE the next accident to happen?

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Commercial real estate is shaping up to become another causality of the financial crisis and CRE mortgage delinquencies and loan defaults are now starting to pile up on the balance sheets of US financial institutions. That is of course on top of losses from residential real estate, consumer credit and the securitization markets that sort of connect all the sore spots on Wall Street.

$817 billion of total CRE-loans are still outstanding in June, 2009, and about 29 billion have run into trouble. In the month of June loan delinquencies soared by $10 billion heating up the debate about future CRE losses by financial institutions.

But that’s not all. About $105 billion worth of troubled loans have been worked out. A majority of those loans experienced an averaged loss of almost 64 percent. Delinquency rates on CRE are up to 4.5 percent in the second quarter from 3.6 percent in the first quarter, 2009.

Similar to residential real estate CRE property prices have also collapsed. Moodys/REAL Commercial Property Price Index (CPPI) has not bottomed as of April 2009:

CREallPropertynationalindex

In CRE much like with residential real estate many loans have been securitized and actual losses to financial institutions and investors will therefore depend largely on two conditions. First, the total amount of loan defaults will be substantial given the collapse in prices. Second, FASB statements 166 and 167 will determine how big the losses are or if they can be deferred onto some future time horizon.

FASB statements 166 and 167 refer to securitized loans in special purpose entities, and require banks to consolidate insufficiently capitalized SPEs onto their balance sheets. Although this should foster more disclosure for investors its impaired with whims of possible rule-bending.

FASB determination to implement these rules is another uncertainty factor. In April, 2009 FASB halted fair value accounting to stop the hemorrhaging of impaired financial assets. Statements 166 and 167 are supposed to take effect in the first fiscal quarter beginning after November 15, 2009.

Some are already preparing for the worst. Bank of America now expects to bring about $150 billion back onto its balance sheet under the new FASB rules. This 150 billion off-balance-sheet assets comprise of $12 billion home equity conduits, $85 billion card securitizations, and other variable interest entities make up the remaining $53 billion. Maybe BofA is just lucky.

A muddle through version of a stress test

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America is leading the way, and Europe follows. But is it really? A few days ago the Federal Reserve published results of its Supervisory capital Assessment Program (SCAP). Although received with plenty of criticism it revealed a rather robust capital position of America’s largest financial institutions. Only a few of them are in need of fresh capital, if the economy were to worsen significantly. According to the results it is likely that concerned banks do not need any more tax payer funds to meet their requirements.

EU-Finance Commissioner Joaquín Almunia wants a stress test for European banks and financial institutions. Unfortunately this European version will be less transparent and less scrutinizing. A capital adequacy test will be applied only to the financial system as a whole and does not concern individual financial institutions. The question will be answered if financial institutions in general will be able to withstand a worsening of the financial crisis. The council for Economic and Financial Affairs (ECOFIN) contrary to Mr. Almunia wants the results of the stress test not being published. The question bears to mind which member states and their finance ministers do not want the health of their financial institutions being revealed. One cannot help but speculate that European financial institutions are in direr straits than their US counterparts. If there is only one result coming out of this half secretive test it will be this.

Written by Alfred

12. May 2009 at 5:01 pm