Raiffeisen records a good operational half-year result
The first six months of the financial year 2018 were a period of contrast for the Raiffeisen Group: Consistently successful operational banking business saw ongoing positive development in the core business; while themes of corporate governance at Raiffeisen Switzerland remained a matter of public debate. The strong result in the core business and the slight reduction in costs led to a good operating result of CHF 517 million. With a half-year profit of CHF 416 million, the 400-million range was again exceeded substantially, as in the previous year. At the same time, the first half-year of 2018 was characterized by the media coverage of the criminal proceedings against the former Chairman of the Executive Board of Raiffeisen Switzerland, as well as personnel developments at the top level of the company.
The Raiffeisen Group once again recorded a pleasing result in the first half-year of 2018. This in particularly due to consistently strong profitability, which rose significantly both in the rates business (+1.6% or +CHF 17 million) and in commissions and services (+3.9% or +CHF 10 million). Due to a one-off high dividend distribution from Aduno Holding AG, income from participations also rose sharply (+156.3% or +CHF 33 million), while a fall was recorded in “other ordinary income”. This, due to notably higher project costs for the new core banking system, which were activated, in the previous year. Thanks to the encouraging operational business development, the operating result nevertheless rose by CHF 8 million to CHF 1,636 million.
Half-year profit again exceeds the 400-million range
Operating expenses fell slightly as a result of reduced investments in the new core banking software. Greater expenditure was incurred in value adjustments on participations at the same time. This was primarily the result of the aforementioned uniquely high dividend distribution of Aduno Holding AG which meant, the level of participations in the company valued according to the equity method, also had to be marked down in profit or loss. Due to the yet unresolved incident of the 24-hour client safe at the Basel branch, provisions have been made precautionary. Thanks to the positive development in the core business, the operating result reached a very high level, at CHF 517 million. With a half-year profit of CHF 416 million, the 400-million range was exceeded once again.
The business volume continued to grow in the first six months of the financial year 2018, whereby developments in the mortgage business were particularly encouraging. With an increase of 2.1% (+CHF 3.6 billion), mortgage loans outperformed the market, while in client deposits, a rise of 0.9% (+CHF 1.5 billion) was recorded. In an increasingly evident trend, clients are shifting parts of their account balances due to the low interest rates into securities. The net new money inflows in the reporting period amounts to +CHF 2.2 billion.
Raiffeisen reorganises its shareholdings
Thanks to the pleasing development of the investment business at the Raiffeisen banks, the Board of Directors of Raiffeisen Switzerland decided in May 2018, to reorient its business with investment clients and to sell Notenstein La Roche Privatbank Ltd. to Vontobel. Although part of the costs incurred by this transaction were posted in the first half-year of 2018, the proceeds from the sale of the participation will only appear in the Group accounts for the second half of this year.
In addition, Raiffeisen has also contested the contracts set up in the context of “Investnet” between Raiffeisen Switzerland and the former "minority shareholders". On this basis, Investnet AG will be replaced as the asset manager of KMU Capital AG. KMU Capital AG is working hard on transferring the portfolio to a new asset manager, with particular attention to preserving the value of the companies in its portfolio.
For a good two years, Raiffeisen has consistently been pursuing the divestiture strategy it adopted, with the aim of simplifying its shareholding structure and reducing potential conflicts of interest. While participations are being sold on the one hand, Raiffeisen is on the other hand placing greater emphasis on collaborations in certain fields of business.
Strategy-compliant risk situation
The value adjustments for default risks rose during the first six months to CHF 217 million, which corresponds to a share of 0.12% in relation to the overall credit volumes. The increase is down to the value adjustment of an individual item, while the value adjustment level in the lending activity of Raiffeisen banks fell even further. After the announcement of the FINMA process concerning the deficiencies in corporate governance at Raiffeisen Switzerland, Moody's adjusted the long-term deposit rating of Raiffeisen from Aa2 to Aa3 and the senior unsecured debt ratings to A3 from A2 irrespective of consistently solid risk data. The rating agency is thus giving more weight to the possible medium-term effects of reputational damage than to the Group’s by Moody’s attested consistently good fundamental data, including solid capital and liquidity provisions.
Definitive TLAC requirements in the consultation process
The consultation process for the changes to the Capital Adequacy Ordinance in relation to the gone-concern requirements for domestic, systemically important banks has been ongoing since 23 February 2018. Domestic, systemically important banks like Raiffeisen are to maintain additional loss-absorbing capital for any restructuring or processing (gone-concern) amounting to 40% of the going-concern requirements. The changes should come into force as of 1 January 2019.
The Group's risk-weighted capital ratio stood at 16.9% and the risk-weighted going-concern capital ratio at 16.6% as of 30 June 2018. For the set-up of the additional gone-concern requirement, a transitional deadline of seven years has been granted in accordance with the consultation submission. Raiffeisen expects to be able to meet the additional requirements on its own, without extraordinary financing. At 7.0%, the leverage ratio already exceeds the future unweighted TLAC requirements.
IT focused on new core banking system
Since the start of the year, the first 22 Raiffeisen banks have been working with the new Arizon Core banking System (ACS). The remaining Raiffeisen banks were planned to migrate to the new platform by the middle of the year, but due to the size and complexity of this project the initial focus was subsequently placed on optimisation of the system operation. In addition, numerous bank mergers took place in the first half of the year, which have been carried out successfully and the optimisation phase has been further pursued in the meantime. In a second pilot tranche, additional Raiffeisen banks will be transferred to the new system before the remaining banks are going to be migrated.
Corporate governance stays in focus in the second half-year
Since the opening of the FINMA investigation and the criminal proceedings against the former Chairman of the Executive Board of Raiffeisen Switzerland, Raiffeisen has seen an eventful phase. With the conclusion of FINMA's enforcement process on 14 June 2018, Raiffeisen Switzerland has acknowledged the improvement measures contained within the ordinance and will rapidly implement the corresponding improvements in its corporate governance. The premature renewal process of the Board of Directors represents a sign of a new beginning at the Board's personnel level, too. At the Delegate Meeting of 16 June 2018, Rolf Walker and Thomas Rauber, two new members of the Board of Directors were elected. It is the intention to elect four to five new members of the Board of Directors as well as the new Chairman of the Board of Directors, at the next Delegate Meeting of 10 November 2018. Furthermore, on 18 July 2018 Dr Patrik Gisel decided to resign from his role as Chairman of the Executive Board at Raiffeisen Switzerland, leaving the banking group at the end of the year. The search for a new Chairman of the Executive Board is already underway.
From a macroeconomic perspective, the economic environment is expected to remain stable. Due to moderate inflation, the central banks do not see themselves compelled in moving towards a normalisation of the interest rates. Switzerland's challenging low-interest environment therefore can’t be expected to change any time soon while interest margins will remain under pressure.