Raiffeisen/Russia: fewer links with the west leave remaining ones exposed

This week marks a year since Russia invaded Ukraine. As western military support for the defenders grows, screws on the Russian economy are also tightening. Yet some banks continue to profit from Russian businesses they have yet to sell. The US Treasury Office of Foreign Assets Control wants to better understand Raiffeisen Bank’s Russian operations. This news knocked shares in the Austrian bank down over 8 per cent on Monday.

More financial sanctions by the EU to sever ties between Europe and Russia came last week, including the tracking of central bank assets, which affects the Austrian bank. Most Russian banks, including the largest Sberbank and VTB, were kicked out of Europe last year. Raiffeisen acts as one of the remaining financial intermediaries between Europe and Russia.

Large profits from Russian lending and fees mean Raiffeisen stands out. Operating earnings of €3.1bn were up more than fourfold, more than half the group profit. This proportion had averaged 30 per cent over the previous two years.

To be fair, loan exposures to Russia were reduced last year; €9bn in December or a quarter less than at the end of 2021. These are roughly split evenly between companies and households. But the bank still makes tidy profits from EU cross-border payments and the excess liquidity from repaid loans. Raiffeisen’s share of the former has soared to about a quarter today from a 10th before the war.

Not that shareholders will see any benefits; dividends from the business remain sanctioned and stuck in Russia. Strip out Russia and Belarus (and Bulgaria, sold last year) and the group return on equity drops from 27 per cent to about 9 per cent. Though this is a credible outcome for other European banks, not for Raiffeisen.

The shares trade at less than a third of book value, reflecting a negative value for the worth of the Russia and Belarus equity. A fire sale of these would do investors little good. Raiffeisen having clung to its profitable Russian business for so many years has inflicted long-lasting reputational damage to its shareholders, and is uninvestable.