Strong customer business, lower profit

The realignment of the Raiffeisen Group is reflected in the half-year results for 2019. As of 30 June 2019, Group profit was down by 14.7% year-on-year at CHF 355 million. Customer confidence remains high: In the first half of the year, customer deposits increased considerably compared to the previous year. The performance of mortgage loans has been encouraging as well.

Raiffeisen closed the first half of 2019 with a Group profit that is respectable, albeit lower than the previous year. Banking operations continued to perform positively. Major milestones were achieved in 2019 with respect to the Group's realignment.

Realignment results in lower expenses and income

Raiffeisen simplified its Group structure by selling Notenstein La Roche Private Bank Ltd and integrating ARIZON Sourcing Ltd. The rollout of the new core banking system (ACS) marked a fundamental investment in the future. The efficiency programme launched in April 2019 will improve Raiffeisen Switzerland's performance capabilities. These factors are reflected in both expenses and income. Operating income was CHF 1,518 million (-CHF 118 million), down year-on-year due to the 2 July 2018 sale of Notenstein La Roche Private Bank Ltd, the drop in income from participations and a decrease in other ordinary income (integration of ARIZON Sourcing Ltd into Raiffeisen Switzerland).

On the expenses side, the divestment of Notenstein La Roche Private Bank Ltd and the completed rollout of ACS reduced operating expenses significantly by CHF 66 million to CHF 934 million. A precautionary restructuring provision of CHF 15 million was recognised in connection with the efficiency programme at Raiffeisen Switzerland. The goal is to realise savings of up to CHF 100 million by 2020. These recurring savings will have a particular impact from 2020 financial year onwards.

Due to the negative share price performance of Leonteq AG, the participation was marked down CHF 38 million to market value. An initial depreciation of CHF 26 million for the new core banking system was recognised as well. The ACS rollout provided the foundation for simplifying Raiffeisen's IT landscape, improving efficiency and driving future digitalisation projects. ARIZON Sourcing Ltd, originally a joint venture between Raiffeisen and Avaloq, was completely taken over by Raiffeisen and integrated into Raiffeisen Switzerland, thus taking the Group one step closer towards a simplified corporate structure. The financial impact of this unbundling was recognised in the 2018 net profit and therefore does not affect the 2019 interim financial statements.

Growth in the indifferent business – growth in assets under management in particular

In order to simplify the comparison of figures with the previous year, comments for income and expense items in this section do not include Notenstein La Roche Private Bank Ltd, which has been sold.

The business volume continued to grow in the first half of 2019. The result from interest operations was nearly maintained at CHF 1,133 million (-CHF 4 million) despite pressure on margins. The result from commissions and services was CHF 208 million, slightly above the previous year's result (+CHF 1 million). Trading portfolio assets declined slightly (-CHF 5 million) to CHF 109 million.

Business volume growth was highly encouraging. In particular, Raiffeisen recorded an above-average increase in customer assets in the first six months. Customer deposits grew to CHF 170.3 billion (+2.7% or +CHF 4.6 billion). Custody account volumes expanded strongly as well, increasing to CHF 32.9 billion (+10.6% or CHF +3.2 billion). Raiffeisen benefited from the general market recovery but recorded healthy net inflows as well. Thanks to these inflows, assets under management now stand at CHF 203.7 billion (+3.9% or +CHF 7.6 billion). As expected, mortgages grew more slowly than in previous years, resulting in a total portfolio of CHF 182.2 billion (+1.5% or +CHF 2.6 billion). The loan-to-deposit ratio rose to 89.2% owing to the significant increase in customer deposits.

Prudent credit policy

Value adjustments for default risks on the entire credit volume stood at CHF 254 million, or only 0.133%. Value adjustments from lending activities at the Raiffeisen banks continued to fall thanks to cautious lending policies.

Comfortable starting point for the new TLAC requirements

New capital adequacy requirements came into effect on 1 January 2019 for non-global systemically important banks such as the Raiffeisen Group. These financial institutions must be in full compliance with the requirements by no later than 1 January 2026. The stricter TLAC (total loss absorbing capacity) requirements aim to ensure that systemically important banks can be liquidated without the use of public funds.

At a TLAC ratio of 17.7%, the Group is already very close to the TLAC ratio of 17.9% required by 1 January 2026. The TLAC ratio for 2019, which stands at 15.3% after taking into account the transition rules, is well met by the Group's 17.7% ratio. Raiffeisen is convinced that its high earnings retention rate will enable it to achieve the target set for 1 January 2026 within the seven-year transition period. The current TLAC leverage ratio of 7.6% already exceeds the unweighted TLAC requirement of 5.9% that will be imposed in future.

Rapid reform of the Raiffeisen Group – consensus found regarding key points

"Reform 21", a working group consisting of representatives of the Raiffeisen banks and Raiffeisen Switzerland, has been addressing key issues for the Raiffeisen Group such as corporate governance and our values since the start of the year. The group also drew up a draft of the owners' strategy. All the Raiffeisen banks worked out a shared understanding of these issues at the owners' workshop on 14 June 2019, thus laying the foundation to integrate them in the articles of association at the extraordinary Delegate Meeting on 16 November 2019.

Outlook

From a macroeconomic perspective, we expect the economic environment to remain challenging. In addition to ongoing geopolitical uncertainty, Raiffeisen expects economic growth to weaken in the second half of 2019, largely due to the global economy that is continuing to lose momentum. The US Fed's turnaround has made the normalisation of interest rates a distant prospect. This means Switzerland will likely face negative interest rates in upcoming quarters as well. Pressure on interest rate margins will continue.