The Austrian bank, whose bonds and stock have come under selling pressure in recent months, revealed a €493m loss for 2014 on Monday evening. It took a €148m goodwill impairment on its Russian subsidiary and said it would cut its exposure to the Russian market, with a risk-weighted asset (RWA) reduction of around 20% by the end of 2017.
RBI has also decided sell its operations in Poland and Slovenia, along with its direct banking unit Zuno, to increase its capital buffers.
The Russian withdrawal will have grabbed the attention of other banks that have been active in Russia in the past, particularly those that have remained open to new business since EU and US sanctions against state entities were introduced last year. Problems in Russia are legion. The weak rouble, sliding oil prices, high inflation and rising lending rates, political sanctions and rating cuts have all conjured the spectre of another financial crisis.
Big lenders to Russian corporates in recent years have included Bank of America Merrill Lynch, BNP Paribas, Citi, Credit Agricole, Deutsche Bank, ING, Nordea and Société Générale.
But while RBI’s announcements add to the gloom around the CEE loan market, and suggest another bank losing the will to lend in Russia, the poor result does not come from asset losses. In fact, RBI reported a €342m profit on Russian business for 2014, after tax. Russian credit defaults are still few and far between.
Asset quality in Russia will deteriorate as the economy weakens. But each bank with Russia exposure will be exposed to different sectors and will have different provisions and collateral arrangements. Even if Russian defaults do start to rise in the coming year, they will be well telegraphed. Big changes are already going on within Russia, such as state banks angling to buy struggling smaller firms using government money.
The mid-market corporate sector is going to come under pressure, which will hurt even the bigger banks in Russia. But there is some way to go before the damage goes beyond isolated Russian defaults among smaller private companies. Covenant breaches and other wrangles will crop up for western lenders, but not a wave of outright defaults.
Profitability in Russia is a bigger issue for banks that earned good money there before 2014.
The obvious reason for doing business there (and anywhere outside of home markets) is that the margins are better. Good banks will have priced the risks they were writing correctly and therefore can afford deterioration in assets. Future business may be challenging, but people and companies still need banking products in a downturn.
Banks' Russian exposures are normal bank business, quite a different proposition to the ill-understood shocks that rocked the banking system during the 2008 credit crisis. Those came from things like CDOs of ABS, magnified by synthetic leverage and monoline exposures – all of which collapsed almost overnight due to the fragility and poor design of the products and the overall system. Loan performance will decline, but it will not fail catastrophically.
As the credit crisis claimed its early victims in 2007, it was tempting for bankers to engage in schadenfreude at the demise of their more aggressive competitors.
None of that will be heard in the CEE loan market when speaking of RBI’s problems. When it comes to victims of difficult markets, the first is seldom the worst, and gloating now can come back to haunt you later. Nor will any banker focused on Russia be pleased if another potential partner for deals bows out.That makes keeping things going only more difficult for everyone.
But even in the gathering gloom, RBI cannot be seen as a warning sign of an approaching crisis. Though RBI's logo colours are arguably the right flare of yellow, it is no "canary in the coalmine" for western banks with Russian business.