OREANDA-NEWS. April 16, 2008. The Raiffeisen Zentralbank Osterreich AG (RZB) Group moved forward with its growth strategy in 2007: the balance sheet total rose by 18,8 per cent to 137,4 billion euros, accompanied by a 35,2 per cent increase in equity to 10,3 billion euros, while the number of retail customers grew by 1,5 million to approximately 13,6 million, and the number of branches increased by 5,9 per cent to 3,036 with a 10,7 per cent rise in the workforce to 61,351, reported the press-centre of RZB.

At the same time, RZB boosted its pre-tax profit to 1,485 million euros, an increase of 15,5 per cent compared to the previous year (excluding one-off effects*). Compared to the figure including extraordinary one-off effects, profit before tax would have declined by 21,1 per cent. 
 
* One-off effects 2006 from the sale of Raiffeisenbank Ukraine and of the minority interest in Kazakh Bank TuranAlem amounting to 596 million euros.
 
This is a truly impressive result, given the persistent problems being faced on the capital markets. “RZB achieved this good result through organic growth in its strong core business segment,” noted CEO Walter Rothensteiner. “RZB’s operations are well diversified in terms of geographical regions, customer areas and products, and enjoy a solid foundation, thanks to the excellent cohesion within the Raiffeisen Banking Group. This makes RZB much more resilient to shocks than banks which have a one-dimensional business model.”
 
Renewed increase in market share in Austria.
“Amidst the currently turbulent conditions, RZB’s good strategic positioning is proving to be the key to success. Not only have we maintained our strong earnings ability, we continue to grow significantly stronger than the overall market. As a result, we have been able to expand our market position, both in Austria and in Central and Eastern Europe,” said Rothensteiner. For example, measured in terms of the aggregate balance sheet total for the banking sector, RZB boosted its market share in Austria from 14,4 per cent at the end of 2006 to 15,3 per cent. 
 
Balance sheet total more than doubled in just three years.
 
The balance sheet total of the RZB Group increased by 18,8 per cent to 137,4 billion euros, with the European Union accounting for 75,3 per cent. One noteworthy aspect is that the balance sheet total has more than doubled in just three years, almost exclusively due to organic growth. Acquisitions carried almost no weight. With this dynamic increase in the balance sheet total, RZB has once again significantly outperformed the average rate of growth registered in the Austrian banking market, as the Oesterreichische Nationalbank recorded average growth of 12,8 per cent for domestic banks.
 
Outstanding operating result
RZB’s robust organic growth has also had a favourable impact on the development of the operating result. Net interest income rose 34,6 per cent to 2,942 million euros. Net commission income increased 28,8 per cent to 1,516 million euros. The decline in trading profit (94 million euros, down 63,2 per cent), however, reflects the adverse market conditions. On balance, an increase of 24,8 per cent was recorded in operating income, which rose to 4,648 million euros. 
 
General administrative expenses went up 25,2 per cent, amounting to 2,645 million euros. In absolute figures, operating income increased by 924 million euros, while general administrative expenses rose by 532 million euros. As a result, the profit from operating activities increased to 2,003 million euros. This represents growth of 24,3 per cent. 

Valuation of securities and derivative instruments
Since the middle of 2007, the financial markets have been influenced by volatility and uncertainty: spreads have risen sharply and changes in risk perception have led to elevated risk premia and for some securities there was no market any more. The impact of these developments was reflected in RZB’s investment portfolio. There was, however, no direct investment in assets backed by sub-prime mortgages and the indirect exposure amounted to just 24 million euros. 
 
As of the balance-sheet date, the valuation of securities and derivative financial instruments in the investment portfolio pursuant to IFRS resulted in a negative contribution of 312 million euros. 
 
RZB applied the mark-to-market method for this valuation. It has reported these impairments in the income statement and did not book it against equity. From the current vantage point, the difficult market conditions are expected to persist at least until well into the second half of 2008.

Compared to other banks, RZB has come through this crisis relatively unscathed. As CEO Rothensteiner noted, “Even though RZB was not in the midst of the storm it was hit by peripheral winds. There may have been some windows broken in the house, but the roof of RZB remains fully intact due to its solid foundation and structure.”
 
Profit before tax rises to 1,5 billion euros.
 
In the end, the excellent operating results ensured an increase in net profit. One positive factor in this regard was the development of risk: in 2007, allocations of risk provisions were down 11 per cent on the previous year. This decline of 308 million euros was mainly due to the net release of 51 million euros in provisions related to business with customers serviced from Vienna. This development, in turn, reflected the positive economic conditions. 

As a result, profit before tax amounted to 1,485 million euros, increasing by 15,5 per cent on the comparable 2006 figure excluding one-off effects. Profit after tax increased by 15,0 per cent to 1,190 million euros.

Minority interests in profit rose as a result of the capital increase of Raiffeisen International Bank-Holding AG. In the course of this increase, RZB did not exercise all of its subscription rights and as a consequence, RZB’s calculated share decreased from 70,0 to 68,5 per cent. At the same time, earnings growth at Raiffeisen International was higher, resulting in a stronger impact of minority interests in group profits.

For these reasons, profit after tax and minorities (consolidated profit) did not rise as strongly as profit before and after tax. Nevertheless, profit after tax and minorities still grew by 3,5 per cent to 778 million euros. (All comparisons relate to the corresponding figures for 2006, excluding one-off effects.).

 Solid indicators
Although there was once again a strong emphasis on expanding the sales network in 2007, the cost/income ratio was nearly the same as in the previous year: the ratio of administrative expenses to operating income was 56,9 per cent, up minimally on the previous year’s figure of 56,7 per cent. Due to the strong rise in the capital base, the rise in earnings did not result in an increase in the return on equity (ROE).

ROE before tax decline by 4,5 percentage points to 22,2 per cent. Return on Assets (ROA) before tax came in at 1,17 per cent and was thus slightly lower than last year’s figure of 1,25 per cent. The Risk/Earnings Ratio improved by 5,4 percentage points to 10,5 per cent, thanks to the favourable risk development.
 
Corporate customer business continues its powerful development
The development of RZB’s largest business segment, corporate customers, was once again very pleasing last year. This business segment accounted for more than 57 per cent of the total profit before tax generated in 2007, up 13,2 percentage points on 2006. The segment’s profit rose by 50,0 per cent to 848 million euros.
 
“Our corporate customer business was a solid, reliable source of earnings in 2007. RZB’s strength in this segment is founded on its commitment to long-term business relationships with its customers and top-notch product and service quality,” explained Rothensteiner.
 
Business with corporate customers expanded in both CEE and in Austria. The pre-tax result posted by Raiffeisen International in this segment advanced 43 per cent to 669 million euros. At the same time, the gross result (sum of net interest income, net commission income and trading profit) of business with Austrian and multi-national corporate customers served from Vienna was up 12 per cent to 264 million euros.
 
Strong growth rates in retail banking
Impressive performance was registered in business with retail customers, which include private customers and small and medium-sized enterprises with less than 5 million euros in annual turnover. Some 1.5 million new customers were added in 2007, bringing the total number of customers in that segment to 13,6 million. An average of three new branch offices was opened per week, bringing the network in CEE to 3,015 business outlets. The number of outlets should rise to 3,750 with organic growth by 2010.
 
Profit before tax in this business segment was generated primarily in CEE and rose 91,6 per cent to 495 million euros. The retail banking segment contributed 33 per cent to the total pre-tax profit for the year in 2007, an increase of 17 percentage points. 

Solid performance as a banker for banks

Profit before tax in the segment Financial Institutions and Public Sector dropped off modestly in 2007 to 198 million euros. This 4,5 per cent decline reflects the mark-to-market valuation losses on bank securities in the banking book, which were recorded in this segment. Nevertheless, RZB’s development as a banker for banks was quite favourable, as the increase in operating results amounted to 18 per cent.
 
The business segment Proprietary Trading was affected most by the impacts of the market turbulence, and profit before tax in this segment was negative, with the loss amounting to 103 million euros.
 
The segment Participations and Other, however, was able to book a pre-tax profit of 47 million euros. Consolidation effects, non-banking activities and participations are reported in this segment, as well as the one-off effects in 2006.
 
Healthy level of own funds
 
The total own funds of the RZB Group increased by 35,2 per cent to 10,3 billion euros. This growth is due to reinvested profits, capital increases at RZB AG and Raiffeisen International and issues by the bank. The excess-cover ratio was 37,5 per cent as of the balance-sheet date, with an own funds ratio of 11,0 per cent and a core capital ratio of 8,8 per cent. “RZB has more than 2,8 billion euros in excess own funds. That’s truly comforting coverage when it comes to equity,” noted CEO Rothensteiner.
 
Around 5,900 new jobs created
 
As of the balance-sheet date, RZB employed a workforce of 61,351 (in full-time equivalents), with 2,858 staff in Austria (up 10,9 per cent), 58,111 in CEE (up 10,6 per cent) and 382 in the rest of the world (up 16,1 per cent). The total increase in the workforce amounted to 10,7 per cent, meaning that in 2007, RZB created around 5,900 new jobs, which reflects the brisk pace of growth.
 
Dynamic developments at Raiffeisen International
 
Pleasing results were also achieved by the listed RZB subsidiary Raiffeisen International. The balance sheet total of the holding for the RZB network in CEE increased 30,2 per cent to 72,7 billion euros, and this part of the group made a disproportionately large contribution to RZB’s success in 2007 again. Consolidated profit after tax and minorities improved by 41,7 per cent to 841 million euros, compared to the previous year excluding one-off effects. Despite the capital increase in the autumn, earnings per share rose from 4,17 euros (in 2006, excluding one-off effects) to 5,80 euros.
 
[Note: The geographical segments Central Europe, South Eastern Europe and CIS at RZB do not perfectly reflect the annual profit of Raiffeisen International, in particular due to refinancing and management costs, as well as the CEE business of other group members. Moreover, in comparing the consolidated profit figures, minority interest in Raiffeisen International which are not included in the RZB results must be taken into account.]

For a detailed description of the business segments and in-depth information on business performance, the balance sheet and the income statement, please refer to RZB’s 2007 Annual Report, which can be downloaded at http://ar2007.rzb.at.