Austria’s Raiffeisen is in talks with two potential suitors for the sale of its Russian banking arm, the largest western-controlled lender left operating within the Kremlin’s territory.
Raiffeisen has come under increasing pressure from regulators and western governments in recent months over the status of its business in the country, which has boomed since Moscow launched its full-scale invasion of Ukraine in February 2022.
The bank’s Russian arm manages assets of just under €27bn, with a book value of €4.1bn. In 2022 it generated profits of €2.2bn — 60 per cent of the earnings for the entire Raiffeisen group. However, Russian laws enacted since the country attacked its neighbour prevent the division from paying any dividends to its Vienna-based parent.
Speaking at Raiffeisen’s annual meeting on Thursday, chief executive Johann Strobl said the bank was “progressing potential transactions” and that its management “recognise the urgency for action which the war has created”.
A senior Raiffeisen executive told the Financial Times the bank had narrowed discussions to two “viable” bidders and would work intensively in the coming weeks to assess whether a deal could be put together. The bank is hopeful it can agree terms to an exit this year.
While Raiffeisen is keen to maximise value from any transaction for shareholders, the big stumbling block is likely to be political, given recently introduced legislation that means Russian president Vladimir Putin would need to personally approve any sale.
A plan B being explored by Raiffeisen is a spinout of its Russian business into a separate, European-listed entity. Such a measure is seen as the more costly of the two options but more politically viable, and will become the bank’s preferred course of action if both bids in Russia fall through.
Any sale within Russia will be subject to a punitive haircut: foreign businesses from designated “unfriendly” states, which include Austria, are subject to a minimum 50 per cent valuation discount and an additional 10 per cent levy to be paid directly to the Russian state.
Raiffeisen expects to take a €1.8bn accounting hit to its balance sheet from any deal. The bank’s core tier one equity ratio — a key measure of balance sheet strength — will remain about 14 per cent even under such circumstances, comfortably above the regulatory minimum.
The FT this month reported details of a controversial plan by Raiffeisen to swap a chunk of its marooned assets in Russia with those of Russia’s Sberbank in Europe, in what one banker involved in the transaction described as a “financial prisoner exchange”.
Pressure on Raiffeisen to leave Russia has been steadily mounting.
The US Treasury department’s Office of Foreign Assets Control was revealed in February by Reuters to have sent an extensive list of exploratory questions to the Austrian bank over its business in Russia as part of a sanctions-compliance monitoring exercise.
The European Central Bank, which supervises all systemically important EU lenders, has, meanwhile, demanded a concrete plan from Raiffeisen to wind down its Russian activities.
And Ukraine — where Raiffeisen also has a sizeable business — has threatened to place the bank on its own sanctions list and has been lobbying hard in Europe for punitive measures to be taken against it.
Raiffeisen trades at a significant discount to its European banking peers as a result of its Russia exposure.
In an effort to mollify such concerns, it intends to continue to significantly reduce its lending activity in Russia in the coming months, regardless of how strategic discussions progress, according to one Raiffeisen board member.
Last year it reduced lending to Russian institutions and companies by 30 per cent.
The bank’s depositor base will be harder to curb, however. Corporate and individual clients in Russia, including many European and US companies, have flocked to Raiffeisen because of its western connections. The lender is also heavily used by western embassies and journalists still operating in Russia.
Last year it became the single largest facilitator of financial transfers into Russia over the Swift network, accounting for up to 40 per cent of all payments in and out of the country.