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Posts Tagged ‘financial statement

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

Another stab at Goldman’s earnings

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2Q0910-Q-GS-cashflow

Accounting statements in accordance with the actual business are more and more becoming complex and bloated fixtures of financial institutions. At the end of third quarter 2008 Goldman Sachs listed six recent accounting developments on its consolidated financial statement 10-Q.

This changed dramatically for the most recent quarter and Goldman’s 17 accounting changes opened a new frontier for wild west style accounting. Though these days reading a financial statement and understanding it is almost impossible, tenacity can pay off and hopefully reveal some insight into the health of Wall Street’s former behemoths.

Under cash flow from operating activities there is a fixture called trading assets at fair value. There is nothing peculiar about this other than the fact that its value jumped beginning with the fourth quarter of 2008. Inquisitive minds might remember that a significant accounting change took place during this quarter.

The Financial Accounting Standards Board (FASB) introduced FAS 157-3 in October 2008. Staff Position 157-3 acknowledged the use of management estimates or assumptions in “Determining the Fair Value of a Financial Asset When the Market for That Asset Is Not Active”. In April 2009 this accounting rule was amended to FAS 157-4 to accept this kind of fair value estimates also to not orderly transactions with significantly decreased trading activity.

Goldman’s worst quarter ever was the third quarter ending August 29, 2008. This was the quarter before the accounting changes were implemented. During nine months ending August 2008 (GS fiscal year used to start in December before the firm changed its status to a bank holding company), cash flow item trading assets at fair value registered a meager inflow of $37.9 billion. A year earlier the company had even outflows of $92.7 billion on the same position.

From January to June 2009, in the first two quarters of the new bank holding company, inflows into this category of cash flow from operating activities had already taken off at $172.39 billion. A year earlier in the six months to May 2008 inflows came in at only $28.8 billion. The firm of course does not further specify trading assets at fair value and which assets create its cash flow. 

Since assets are designated fair value therefore not easily convertible to cash it is reasonable to assume that cash flow generated is associated with non-current assets. Associated cash flows are added back or subtracted from the income statement depending on inflows or outflows respectively. In that sense $172.39 billion of fair value inflows might have substantially contributed to positive earnings during the first two quarters of 2009.

I think is is fair to say that accounting change FAS 157-3 threw a lifeline to even our most venerable institutions on Wall Street. In the Huffington Post Nathan Lewis asked the question: Do We Need Goldman Sachs? Without FAS 157-3 this question would be redundant. Most likely GS would have already drowned in the stormy sea of mortgage backed securities and credit derivatives.

Could it be that recent celebrations on Wall Street are nothing but a smoke screen blowing hot air into the face of investors? In its August monthly report a congressional oversight panel (COP) evaluating troubled assets on the books of large and smaller BHCs came to the conclusion that a substantial portion of toxic assets from mortgage backed securities and real estate whole loans still remains on bank balance sheets.

Goldman Sachs and Bank of America are two examples of masterful deceit sanctioned by the appropriate agencies. I am beginning to think that former New York AG Spitzer is right and democratization of capital markets is no more.

Written by Alfred

12. August 2009 at 4:53 pm