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Raiffeisen International: Annual Report 2005

30 June 2006

Record Year for Raiffeisen International

Raiffeisen International: Annual Report 2005

Consolidated net profit surges by 83 per cent to € 382 million. Total assets grow by 41 per cent to almost € 41 billion. Successful IPO followed by largest acquisition in the company’s history – Bank Aval. Growing importance of retail banking as well as Southeastern Europe and CIS segments as planned.

Raiffeisen International Bank-Holding AG, operating the Central and Eastern European subsidiaries of its parent company Raiffeisen Zentralbank Österreich AG (RZB), has ended the business year 2005 with record profit growth. Consolidated net profit (after tax and minorities) amounted to € 382.3 million (2004: € 209.4 million), surging by € 172.9 million (82.6 per cent). Profit before tax climbed to € 568.6 million (2004: € 340.8 million), while Profit after tax rose to € 459.6 million (2004: € 269.8 million). Earnings per share increased by € 0.86 to € 2.79 (2004: € 1.93). All figures according to International Financial Reporting Standards (IFRS).

Herbert Stepic, CEO of Raiffeisen International: „The business year 2005 was not only the most eventful, but also the most successful in the history of Raiffeisen International. We have successfully completed the largest IPO in Austrian history and, with Bank Aval, closed the largest acquisition in the long history of Raiffeisen. Finishing the year with the largest profit increase in the history of this company completes the pleasant picture. Over the past three years, we have almost quadrupled our consolidated profit.”

In 2005, Raiffeisen International acquired JSPP Bank Aval in Ukraine, becoming the largest banking group in this growth market of 50 million inhabitants. In February 2006, Raiffeisen International announced the acquisition of Russian Impexbank, which is expected to be completed by the middle of May. Upon completion of the acquisition, Raiffeisen International will become the largest international banking group operating in this growth market of 140 million people.

„Our strategic position to utilize the long-term growth potential in the region is already superb. Especially in the high growth markets Southeastern Europe and CIS we have an unparalleled market position, which already pays off”, said Stepic with reference to the fact that these two regions already contribute 60 per cent to pre-tax profit. “With Impexbank, we are on the brink of a quantum leap in Russia.”

Volume significantly increased – Total Assets grew by 41 per cent

Raiffeisen International has utilized the dynamic growth potential in the markets of Central and Eastern Europe (CEE) and significantly increased its customer business. Loans and advances to customers surged by 52.2 per cent to € 24.7 billion, while deposits from customers increased by 37 per cent to € 24.9 billion. Total assets grew by 40.8 per cent to € 40.7 billion, with two thirds accounted for by organic growth. Stepic: “Within the past two years we have doubled our assets and we are therefore one of the strongest growing banking groups in the region.”

Operating Results and Efficiency further improved

Operating income improved across all components and grew by 45.5 per cent to € 1,887 million. Net interest income amounted to € 1,202.1 million or 63.7 per cent thereof and experienced the strongest growth with 49.6 per cent. Net commission income improved by 35.8 per cent to € 406.8 million, while trading profit surged 36.6 per cent to € 300.8 million.

Due to tight cost management, general administrative expenses increased only by 41.2 per cent to € 1,162.5 million despite significant investments and stayed below the increase of operating income. Resulting profit from operating activities increased by 52.9 per cent to
€ 725 million. The Cost/Income ratio, which represents general administrative expenses in relation to operating income, further improved from 63.5 per cent to 61.6 per cent.

Enhanced Risk/Earnings Ratio

The provisioning for impairment losses climbed by 21.6 per cent to € 167.3 million which is significantly less than the increase of net interest income (plus 49.6 per cent). “We have improved in all major risk ratios”, said Martin Grüll, CFO of Raiffeisen International.

The provisioning ratio decreased by 0.17 percentage points to 0.81 per cent (2004: 0.98 per cent). The share of non-performing loans of the total credit portfolio declined to 1.7 per cent (2004: 2.4 per cent). The resulting coverage ratio (total provisioning for impairment losses/non-performing loans) improved to 154.1 per cent (2004: 96.9 per cent). The risk/earnings ratio advanced from 17.1 per cent in 2004 to 13.9 per cent. “We have already achieved our medium-term target to get below 15 per cent”, Grüll added.

Equity Base significantly strengthened

At year-end 2005, Raiffeisen International's equity (including minorities and consolidated profit) increased by 50.5 per cent to € 3,276.4 million (2004: 2,177 million). Return on Equity (ROE) before tax amounted to 21.8 per cent, a decrease of 0.4 percentage points compared to 2004, which is attributed to the significantly expanded equity base.

The Group's Tier1 ratio for the banking book, which reflects the financial strength, came to 9.0 per cent (2004: 11.8 per cent). The Tier 1 ratio including market risk was 8.0 per cent (2004: 10.1 per cent), which is twice the amount required by law (4.0 per cent).

In April 2005, Raiffeisen International shares were floated on the Vienna Stock Exchange (issue price: € 32.50) in the biggest Initial Public Offering in Austria’s history. In the course of the year the share price developed favourably und gained more than 70 per cent to € 55.55 by year-end. The Managing Board will propose a dividend of € 0.45 per share for the business year 2005 at the Annual General Meeting, which would yield a payout ratio of 16.8 per cent.

Branch Network substantially expanded, Customer Number almost doubled

In the past year Raiffeisen International continued to invest in the expansion of the branch network, adding 185 new outlets. In addition to that Bank Aval contributed 1,342 outlets, bringing the total number of outlets to 2,443, which is 1,527 or 167 per cent more than in the previous year.

The number of staff almost doubled in the reporting period to 43,614 (2004: 22,851), primarily due to the acquisition of Bank Aval. At year-end 2005 Raiffeisen International served 9.7 million customers almost double the number of the previous year (5 million). Of the 4.7 million increase 3.3 million were contributed by Bank Aval with the remaining 1.4 million (30 per cent) new customers accounted for by organic growth.

Segment Reporting

The business activities of Raiffeisen International are portrayed by business lines as well as regional segments.

Business Lines

The Retail Customers segment encompasses all private individuals, the self-employed and small and medium-sized enterprises with annual revenues of less than € 5 million. This segment registered the highest profit growth with 183.7 per cent in the year under review and contributed € 117.6 million to the Group's profit before tax (2004: € 41.5 million). The ROE before tax improved to 15.1 per cent (2004: 11.1 per cent) and the cost/income ratio to 78.6 per cent (2004: 83.6 per cent). Grüll: „The high investment in the expansion of the branch network fully pays off. With currently 10 million customers, we have a solid basis for sustainable growth”.

The Corporate Customers segment comprises business with large corporates and middle market companies from CEE as well as companies from other countries that are active in the region, especially multinational corporates. The segment reached a profit before tax of € 336.8 million (2004: € 229.2 million). Pre-tax ROE was 26.9 per cent (2004: 29.4 per cent) and the cost/income ratio 40.2 per cent (2004: 41.8 per cent).

The Treasury segment encompasses the Treasury departments’ trading for their own account as well as investment banking activities, which are only carried out by some group units. The segment earned a profit before tax of € 184.1 million (2004: € 111.9 million). Pre-tax ROE was 43.8 per cent (2004: 33.2 per cent) and the cost/income ratio 18.1 per cent (2004: 23.2 per cent).

Participations and Other recorded a loss of € 70.0 million (2004: € -- 41.8 million). Besides non-banking activities, this segment encompasses the refinancing as well as the management of equity participations.

Regional Segments

Central Europe encompasses the Czech Republic, Hungary, Poland, Slovakia and Slovenia. The segment recorded a profit before tax of € 229.9 million (2004: € 161.2 million). Pre-tax ROE was 17.5 per cent (2004: 18.9 per cent), and the cost/income ratio was 66.2 per cent (2004: 65.7 per cent).

Southeastern Europe contains Albania, Bosnia and Herzegovina, Bulgaria, Croatia, Kosovo, Romania as well as Serbia and Montenegro. The segment recorded a profit before tax of € 187.7 million (2004: € 100.9 million). Pre-tax ROE was 22.6 per cent (2004: 21.7 per cent), and the cost/income ratio was 62.8 per cent (2004: 67.4 per cent).

Commonwealth of Independent States comprises Belarus, Kazakhstan, Russia and Ukraine. This segment recorded a profit before tax of € 151.0 million (2004: € 78.7 million). Pre-tax ROE was 32.3 per cent (2004: 36.0 per cent), and the cost/income ratio was 50.9 per cent (2004: 46.9 per cent).

Outlook for 2006

Total assets are expected to grow by at least 20 per cent per year until 2008 with the strongest growth anticipated in the CIS-countries, partly because of the acquisitions made there. In order to further improve the capital base the issue of hybrid Tier 1 capital is planned. Stepic: “We expect strong earnings growth for the medium term in the CIS-countries, above all in Ukraine and Russia. However, we expect that transformation costs resulting from acquisitions will burden the earnings in the short term. For 2006, we expect an increase in consolidated profit of more than 25 per cent.”