rocked markets with a long-expected announcement that it was intent on mergertalks with its parent RaiffeisenZentralbank Österreich AG. Its shares shed a tenth of their valueMay 10, ending the day at €12.19.
"TheQ1 2016 results weredisappointing but the shares were reacting to the planned merger of RBI withRZB," Thomas Unger, a bank analyst at Erste Bank, said in an interview."The market is uncertain because there are no details. We have to wait andsee."
Hesaid the intention was "a downstream merger," with RZB beingintegrated into RBI.
"Itis not clear what assets will be included in the merger," Unger said."RZB holds various stakes including 31% of as well asits Raiffeisen bank assets, which will naturally be included."
Hesaid the question remains of the valuation of the two banks.
"Theconcern is how the minority shareholders of RBI will be treated and how muchthey will hold of the combined business. The fear is that the RBI assets willbe less highly valued," Unger said.
RZBcurrently holds about 60% and the minority shareholders might well be highlydependent upon external valuations to protect their interests. As the centralinstitute of the Raiffeisen or co-operative banks, RZB exercises considerableinfluence over RBI, which represents 87% of its consolidated RWAs and 83% ofits total assets.
SimonAdamson, a bank credit analyst at CreditSights, observed that the bank's fullyloaded CET1 ratio of 10.3% is "low." He said he did not think themerger would be a significant credit event given the cross-guarantee schemethat already exists and the similar ratings both banks enjoy.
RBIsaid the evaluation of the merger "is expected to be completed within sixmonths," which represents a long period of uncertainty. It said the mergerwas being partly driven by the need for simplification and because of increasedregulatory requirements. The implication is that the ECB wants to regulate asimpler bank.
Thecurrent performance at RBI is not good. Net interest income at RBI dropped by13.7% and fee income declined by 11.2% quarter over quarter in the firstquarter. Net income reached €114 million, only recovering to the black thanksto a 77.5% cut to net provisions. Hugo Swann, an equity analyst at CreditSuisse, wrote in a research note thatthis provisioning as "unsustainable" and observed that management hadsaid that it should "not be considered as a run rate for 2016."
Ungerobserved that RBI might effectively be acquired on the cheap given that it iscurrently valued at around half book value.