Undervalued Shares Research Report Raiffeisen Bank International 2023-11-01 2

RESEARCH REPORT
1 November 2023
RAIFFEISEN BANK
INTERNATIONAL:
CAPITAL RELEASE EVENTS
Raiffeisen Bank International owns the most profitable international

bank operating in Russia. The market currently values this subsidiary
at zero. However, a deal that could yield EUR 1.2-1.8bn is in the
offing, with more details likely to be released on 3 November 2023.
The sale and repatriation of funds will likely trigger an entire cascade
of events, including significant capital flowing back to shareholders
and analysts re-rating the depressed stock.
Raiffeisen Bank International could be one of the most interesting

asymmetric investments currently available. It comes with a
50-100% upside over the coming 12-18 months. The Austrian
company has a market cap of EUR 4.5bn and daily liquidity in the
millions of euros.
Product for Lifetime Members only (USD 999 one-off) – www.undervalued-shares.com

RESEARCH REPORT: RAIFFEISEN BANK INTERNATIONAL
1 November 2023
Contents
Introduction by Swen Lorenz 3
Executive summary 5
Chapter 1: The reality of owning a bank in 7

Russia
Chapter 2: Resolving the strategic challenges 13
Chapter 3: Limited downside but 50-100% 23

upside
Disclaimer 30
2
1 November 2023
Even (Russian) banks

can be worth a closer
look
Dear Lifetime Member,
I don't usually spend much time analysing banks, mainly because they
are very complex to analyse.
There are exceptions, though.
Sometimes, the stock market logic underlying a bank stock is simply

too compelling.
Take Bank of Cyprus (ISIN IE00BD5B1Y92, UK:BOCH) as an exam-

ple. On 21 September 2022, I published a Weekly Dispatch about the
London-listed bank with a market cap of then around GBP 500m (EUR
600m).
Unsurprisingly, given Cyprus' reputation as a basket case, a local friend

recommended I stay well clear of this particular institute. Indeed,
many of the usual concerns about banks in general and investments
in Cyprus did apply. However, I believed that other, more powerful
factors were going to override these concerns.
Just over a year later, the stock is up 122%.
Bank of Cyprus
I was convinced that interest by foreign private equity investors and

an emerging new narrative about the bank operation's quality were
going to drive up the stock price from its irrationally low valuation.
Sometimes, stock market logic dictates that you throw all reser-
vations about banks overboard. Bank of Cyprus was such a case,
and sniffing out such opportunities before everyone else is what
Undervalued-Shares.com does.
3
1 November 2023
Today, I'll describe why Raiffeisen Bank International deserves the

same careful consideration, even though it is also a bank and one
closely associated with doing business in Russia. Obviously, the idea of
investing in Russian assets is not exactly widely liked right now. How-
ever, what if you could effectively get a Russian asset for free and
with the added benefit of that asset probably selling for a decent price
soon? This is exactly the scenario that today's report is looking at.
Others should soon hear about this opportunity, too, as Raiffeisen

Bank International is due to release an update for shareholders on 3
November 2023.
As ever, I am merely providing a few initial pointers and some food for
thought. Do your own additional research and look at other informa-
tion resources to double-check if my conclusions hold up to scrutiny.
Raiffeisen Bank International is one of those unusual investment cases

that perfectly illustrates the kind of opportunities that exist if you
make the effort to research overlooked European small- and mid-cap
stocks.
Best regards
Swen Lorenz
Undervalued-Shares.com
4
1 November 2023
Executive summary
Raiffeisen Bank International (ISIN AT0000606306, VIE:RBI) is one
of Austria's leading banks and also ranks among the top ten banks in
Russia.
Following the war in Ukraine and the resulting uncertainty over sanc-
tions, its stock price collapsed from EUR 30 to as low as EUR 10. It's
now trading at EUR 13.70, which gives the bank a market cap of EUR
4.5bn.
After record profits of EUR 2.2bn in 2022, the Russian operation also
remained very lucrative in 2023. The subsidiary has equity of >EUR
4bn, including >EUR 3bn of excess capital.
The market currently values the Russian subsidiary as effectively worth

zero. Only including its business in Austria and Central and Eastern
Europe (excluding Russia), the stock of Raiffeisen Bank International is
trading at a 2025 price/earnings ratio of 3.7 and 0.38 book value.
Since December 2022, the bank has been working towards an exit of
the Russian market. It now has a buyer for its Russian operation, a
term sheet, and a price. The transaction has already been approved
in principle by the relevant Western authorities, and also has a good
chance of getting approved by the relevant Russian authorities. Even
currency restrictions shouldn't prove an insurmountable obstacle,
given the Russian bank's excess cash.
Based on Russian regulations for the valuation of such disposals and

other factors that may lower the achievable price, the bank is likely
achieve a sales price of EUR 1.2-1.8bn (= 0.30-0.45x book value); sales
proceeds would be available to be repatriated to Austria.
Even if the bank walked away from its Russian subsidiary, its CET1 ratio
would remain above the 13.5% minimum management target and the
11.7% regulatory minimum requirement.
On 27 October 2023, Raiffeisen Bank International received regula-

tory approval to pay a dividend for 2022 of EUR 0.80. For 2023, the
dividend is likely to amount to EUR 0.50, and significantly >EUR 1
from 2024. A sale of the Russian subsidiary for EUR 1.2-1.8bn would
generate a one-off influx of EUR 3.64-5.47 per share, Someone buying
into the stock right now at EUR 13.70 could receive up to ≈EUR 7 in
cash payouts by year-end 2024, and a dividend of >EUR 1 p.a. going
forward (rising to EUR 1.55 for 2027).
As a fall-back option, Raiffeisen Bank International has prepared a

spin-off of the Russian subsidiary into a Vienna-listed holding company.
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1 November 2023
Because of what has happened in European interest rates, the Raiffeisen

Bank International of 2023 excluding Russia is more profitable than the
Raiffeisen Bank International of 2019 including Russia. Due to the nor-
malisation of interest rates, the core of the business now produces
14-15% return on equity without Russia, compared to the bank's 11%
p.a. target pre-war and pre-pandemic.
Freed up from the exposure to Russia, the stock of Raiffeisen Bank

International will likely be re-rated by analysts and investors, and
should eventually return to its pre-pandemic level of EUR 20-25. This
would give the stock 50-100% upside.
The company is due to provide a market update on 3 November 2023.

A separation from the Russian operation is now likelier than not, and
on better-than-expected terms.
At prices below EUR 15, the stock of Raiffeisen Bank International

seems irrationally cheap and with a fairly limited downside.
Raiffeisen Bank International at a glance

Share price: EUR 13.70
Number of shares
328.94m
outstanding:
Market cap: 4.5bn
Ticker symbol: VIE:RBI
ISIN: AT0000606306
Major shareholders: Eight state-owned Austrian Landes-
banken (60%), free float (41%)
Website: www.rbinternational.com
Source: Erste Bank, 29 June 2023
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1 November 2023
Chapter 1:
The reality of owning a
bank in Russia
What you are going to learn in this chapter:
• How Raiffeisen Bank International almost left Russia before it

even started.
• Why foreign banks in Russia are so insanely profitable.
• The forces exerting pressure on foreign banks to leave Russia.
A multi-billion profit centre

In 2022, Raiffeisen Bank International earned a staggering EUR 2.2bn
from its operation in Russia. Despite the war in Ukraine and interna-
tional sanctions against Russia, the Austrian banking corporation's
Russian subsidiary was tremendously profitable compared to its equity
of then not even EUR 2bn.
This wasn't always the case.
Few remember nowadays, but the bank's initial forray into Russia in the
1990s brought a massive initial loss.
Called Raiffeisen Bank Austria at the time, the bank developed a plan
to enter the newly emerging Russian market in 1997. However, even
before the Russian operation opened its doors, it lost USD 140m –
equallying the entire equity that the new subsidiary had been given to
get off to a start.
Back home in Austria, banking executives and shareholders didn't care:

"Here is another USD 150m, pour it back into Russia and give it another
try."
Persevering despite the initial setback proved the most lucrative deci-
sion that the Austrian bank had ever taken. By 2007, Raiffeisen had
become Russia's largest foreign bank. In fact, it became not only the
largest European bank in Russia by a comfortable margin, but it was
also the most successful European bank in Russia by many other met-
7
1 November 2023
rics. E.g., unlike other Western banks in Russia, Raiffeisen Bank Inter-
national even managed to develop a very successful retail business in
Russia.
In 2019, the Russian subsidiary briefly generated a staggering 70% of

Raiffeisen Bank International's group profits. During most other years
of the 2010s, it contributed 25-50%.
Source: UBS, 8 August 2023
Both in absolute and relative terms, its business had succeeded

beyond the wildest imaginations.
An Austrian bank specialised in Central and Eastern

Europe
Vienna lies further to the East than Prague, and it's often joked that
Austria is an Eastern European country disguised as a Western Euro-
pean nation.
As a non-NATO, neutral country with strong historical ties to Central

and Eastern Europe, it was not surprising that an Austrian bank came
to be a leader in banking in the region.
What was then Raiffeisen Bank Austria expanded into Hungary as early
as 1987, i.e. even before the Berlin Wall came down.
Today, the bank is strong in its home market of Austria, but also across
the entire Central and Eastern European region. It operates a branch
network in Albania, Belarus, Bosnia and Herzegovina, Croatia, the
Czech Republic, Hungary, Kosovo, Poland, Romania, Serbia, Slovakia,
Ukraine – and Russia.
Its 45,000 employees are servicing over 17m customers across

Central and Eastern Europe, Russia, and Austria. The bank also pro-
8
1 November 2023
Source: Raiffeisen Bank International

investor presentation, August 2023
vides investment banking services and a broad array of corporate ser-

vices, including to Austrian companies.
The most remarkable part of its operation, though, long used to be

that in Russia. The war in Ukraine hasn't changed that, and 2022 even
provided a record profit.
Extraordinary profitability
Despite the sanctions and surrounding circumstances, Raiffeisen Bank
International continues to rank among the top ten banks in Russia
when measured by total assets. In 2022, it still had 90 branches across
Russia and more than 4m clients. Profits increased by a factor of four,
with the current year also shaping up well. During the first half of 2023,
the subsidiary had net profits of EUR 867m, topping even the perfor-
mance of the same period of 2022. Figures for Q3/2023 will form part
of the update that the bank is to publish on 3 November 2023.
Why has Raiffeisen Bank International been so profitable?
On 2 January 2020, The Moscow Times provided an in-depth, English-

language analysis of why foreign banks operating in Russia were so
profitable:
Interest rates: low interest rates are generally bad for banks, but the
net interest rate margins in Russia have always been better than in both
Western and Eastern Europe. When eurozone banks charged -0.5%
p.a., Russian banks were paying +6% p.a. Even by Russian standards,
where companies across many sectors are used to double-digit returns
on equity, banks have long been particularly profitable when measured
by their return on equity. The interest rate spread was one of the main
reasons for that.
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1 November 2023
Limited competition: ever since the Russian debt crisis of 1998, there
has only been a very limited number of foreign banks operating in the
country. In the early 2020s, foreign banks accounted for just 6% of
the Russian banking market. Of that, 75% were split between the Rus-
sian subsidiaries of just four foreign banks – Italy's UniCredit, France's
Société Générale, the US' Citibank, and Austria's Raiffeisen Bank Inter-
national. Russian banking customers who wanted to work with a West-
ern bank had limited choice, and the limited competition allowed for
profit margins to be higher for all foreign players involved.
Trust in Western brands: unsurprisingly, Russian customers put more

faith into Western banks than into the local operators. They were will-
ing to pay a premium for these services, which also improved margins.
In that sense, it didn't take all that much to be among the most profita-
ble foreign banking operations in Russia. Remaining in the country and
running a solid business were enough to produce stellar returns for the
shareholders that owned such operations.
Source: The Moscow Times, 2 January

2020
Stuck between a rock and a hard place

When the war in Ukraine broke out, the West put additional sanctions
against Russia in place. Shortly thereafter, Russia retaliated by setting
up its own sanctions regime.
10
1 November 2023
A foreign-owned banking operation in Russia will now be under pres-

sure from both sides:
• Russian sanctions don't allow foreign banks to repatriate profits.

Whatever money they earn in Russia is stuck in Russia (for now).
• European sanctions effectively push for Western banks to wind

down their business in Russia, and to leave sooner rather than later.
This pressure was exerted not just by the European Union (EU) and
the European Central Bank (ECB), but also by individual countries.
Source: Radio Free Europe, 29 August

2023
• US sanctions further back up the pressure exerted by the EU and

create additional risks, such as potentially losing the ability to carry
out dollar payments. In February 2023, the US' Office of Foreign
Asset Control (OFAC) informed Raiffeisen Bank International that it
was watching its Russian subsidiary, which led to yet more pressure
on the bank's stock price.
Outside of the sanctions there was the public pressure. Being a for-
eign bank operating in Russia and generating vast amounts of profits
on the back of this market turned into a real PR problem.
11
1 November 2023
Even leaving the country isn't easy. Selling a Russian subsidiary requires
approval from the Russian authorities, including from president Putin
himself. Getting such approvals and being allowed to repatriate the
funds involves a lengthy process and is not guaranteed, even if a bank
has a willing buyer.
Simply walking away from a Russian operation may look like an option,
but it could result in lawsuits from shareholders who disagree that
such extreme action is called for at this stage. Besides, gifting a valua-
ble operation to one of Putin's cronies would only strengthen Russia,
which is the opposite of what these sanctions aim to achieve.
What's a bank to do?
More news out soon – watch this space

The wider public should soon learn in more detail what Raiffeisen
Bank International is planning in this regard. The company has already
released some information, and anyone who makes the effort to piece
together the publicly available information can already get a fairly good
understanding of what is likely going to hit the news soon.
I expect the upcoming release of quarterly results on 3 November 2023

to create a lot of additional interest in (and awareness of) the peculiar
situation of Raiffeisen Bank International.
Chapter 2 will provide an outlook based on what is known so far.
12
1 November 2023
Chapter 2:
Resolving the strategic
challenges
• How the pressure on Raiffeisen Bank International to exit Russia

has increased.
• Which main option the bank has been pursuing.
• Why its plan B is not a bad option either.
No way but out

When the war in Ukraine started, there was a lot of general political
pressure to cease any deals with Russia. Despite these headwinds,
Raiffeisen Bank International first took a wait-and-see attitude. It was
backed by the Austrian government, which preferred to keep a route
for the West to carry out financial transactions with Russia. The Austri-
ans argued that a Western banking institute with a broad set of oper-
ational capabilities in Russia could come in handy if there ever was an
asset swap between the West and Russia.
Not unexpectedly, this position proved controversial. At one point,

29 Austrian NGOs published a letter they had sent to Raiffeisen Bank
International asking for operations in Russia to cease.
In summer 2023, the ECB issued a rare public call for all remaining
eurozone banks to exit Russia "as soon as they can". Other national
European regulators issued similar calls at different points in time. On
30 October 2023, the ECB repeated those calls.
Even by the time the ECB made its first statement in this regard,
Raiffeisen Bank International had long accepted the writing on the wall;
it had become clear that the relationship between the West and Russia
would take not years but decades to get back to some kind of normal.
With this being the working hypothesis, Raiffeisen Bank International

concluded that it was no longer the best shareholder for the Russian
operation. For better or worse, in December 2022, the bank decided to
13
1 November 2023
Source: Reuters, 30 October 2023
separate the Russian subsidiary from the rest of its operation. Pressure
from its own shareholders played a significant role in the decision, too.
Among Raiffeisen Bank International's larger shareholders are Austria's
regional Landesbanken, some of which faced political pressure them-
selves not to be involved with Russia.
Options that Raiffeisen Bank International would have considered for

its exit from Russia include the following:
• An outright sale of its Russian subsidiary; this would be the most

obvious option but dependent on many factors, such as actually
having a buyer, agreeing to a price, and getting regulatory approval
from authorities both in the West and Russia.
• A spin-off of the Russian subsidiary and distribution of shares to

the existing shareholders of Raiffeisen Bank International.
14
1 November 2023
• Giving up control of the Russian subsidiary through a management

buy-out; this half-way option doesn't seem viable overall, though.
E.g., selling 25% of the bank to an investor and giving manage-
ment a further 5% would enable Raiffeisen Bank International to
deconsolidate the subsidiary from its balance sheet, but it would
not solve the problem of keeping a very significant financial foot-
print in Russia.
• Gradually running down the portfolio of business activities in Rus-

sia. Eventually, the remaining stump could probably be sold or sim-
ply liquidated. This option would be a variation of an outright sale,
and one that would make the problem drag out for years.
There are probably further variations and combinations of the options

outlined above, and by now Raiffeisen Bank International will have
looked at all of them. The main goal with each of them would be to
recover and repatriate as much of the equity as possible.
One way or another, Raiffeisen Bank International will go ahead to gets

its Russian exposure off the books. The bank has even already pro-
ceeded to get rid of its "Raiffeisen Bank International" branding on top
of its main office building in Russia.
The question is, which option

Source: Telegram posting, showing is Raiffeisen Bank International
the removal of the corporate brand
most likely going to pursue?
from the building in April 2023
Here is what I was able to research

so far.
A potential deal is (nearly)

ready
Raiffeisen Bank International has
now done everything it can in
order to achieve both an outright
sale and a spin-off of its Russian
subsidiary.
As of mid-October 2023, the

bank had a buyer with whom it
had agreed on a term sheet and
a price. It had also obtained, in
principle, approval for a trans-
action from different Western
authorities, including the Austrian
authorities, the ECB, the EU, and
the US' OFAC.
15
1 November 2023
What is currently missing is the approval from Russia.
To get this approval, Raiffeisen Bank International and the buyer will
have to come to an agreement with the Russian central bank and the
office of president Putin.
The prospective buyer has now gone ahead to engage these two stake-
holders.
Raiffeisen Bank International has done the same, and engaged with the
Russian authorities to find out what exactly is needed to get Russian
approval for the proposed transaction.
Much as Raiffeisen Bank International can't provide a definitive time-

line, everything would now be ready on the side of the bank. With that
in mind, it's reasonable to assume that within not too long a timeframe,
the bank should learn what is possible, and what is not.
A key question is, how likely will the Russian authorities approve the
deal?
How (and why) a deal is now likely to proceed

Given the stand-off between Russia and the West, it'd be natural to
question if Russia would have any inclination towards authorising a
transaction that will see an Austrian bank benefit financially – to the
tunes of not just hundreds of millions but potentially one or two billion.
However, to do so would actually be in Russia's best interest.
For Russia, the ability to have one of its approved investors buy a prof-
itable Western banking operation is nothing short of a financial boon.
Because of Russian sanctions against the West and the presidential
decrees relating to Western companies that want to leave the country,
any such transaction can only ever take place at a heavily discounted
price. Whoever is favoured by Putin to take over such an operation
will immediately bolster their fortune. There is also an exit tax on the
purchase price, which feeds straight into the Russian treasury (details
on this later.)
That's besides Russia getting more control over these operations,

instead of being reliant on Western owners. Raiffeisen Bank Interna-
tional is one of just 13 systemically important banks in Russia, and as
such one of the crown jewels of the Russian banking industry.
There is an entire swathe of Russian regulations for Western firms leav-

ing the country, and an additional set of regulations applies for banks.
These regulations are complex, but they have already been tested by
other Western banks.
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1 November 2023
The first such transaction happened shortly after the outbreak of the
war in Ukraine. In April 2022, France's Société Générale decided to
cut its losses and run. The French bank sold its Russian subsidiary,
Rosbank, to Vladimir Potanin, Russian oligarch and owner of Interros
Capital. Overall, it was probably a hurried and therefore quite badly
negotiated exit, but even in this scenario the vendor seems to have
gotten back a triple-digit million euros amount.
Source: Euromoney, 11 April 2022
More recently, in September 2023, Italy's Intesa got president Putin's

approval to sell its Russian operation to management. Italy's largest
bank had been present in Russia for half a century, with 27 branches
servicing corporate clients. No financial details about the sale were
provided, which makes it likely that Intesa received some kind of remu-
neration but did not want to be seen as "profiting" from the sale.
The sale by Intesa, in particular, is worth paying attention to, as it hap-

pened under a now firmly established regime for Western companies
leaving Russia. As Reuters concluded on 29 September 2023, "the green
light for Intesa could pave the way for similar approvals for other lenders
still entangled in Russia."
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1 November 2023
Source: Reuters, 29 September 2023
The Western banking sector has now had much of 2023 to prepare its
next step, and the year-end period is usually a good time for bringing
difficult transactions to a conclusion. Will further transactions like that
of Intesa follow soon, and will Raiffeisen Bank International be among
them?
Now that everything on the Western side of such a transaction has

been prepared, it'd be surprising if the Russian side didn't make a move.
Based on a decree by president Putin, there is now a formula for estab-

lishing how much money a Western firm is allowed to take off the table
if it leaves Russia by selling its Russian operation to a Kremlin-approved
buyer.
In such a case, the Russians require that – in simplified terms – a 50%

discount is applied to that operation's fair value. In most cases, the fair
value is around the book value (which is usually already quite low). On
the sales price, an exit tax of 15% is applied to allow the capital to be
repatriated to outside Russia.
At the end of June 2023, Raiffeisen Bank International's Russian oper-

ation had equity of >EUR 4bn, >EUR 3bn of which were excess capital.
18
1 November 2023
50% discount to the book value and a further 15% exit tax leave an
operation valued at ≈EUR 1.8bn. In comparison, during the first half
of 2023, Raiffeisen Bank International made a net profit of EUR 867m,
which was higher even than the half-year profit of 2022. There is a tre-
mendous amount of excess cash stored within the Russian subsidiary,
and more is added to the pile each day.
Whoever gets to purchase the operation is likely to make a killing.

Grosso modo, the buyer would probably not even pay the full amount
of the cash reserves and get the actual banking operation for free.
The remaining operation will have to reduce or wind down some of its
business, but it'll remain highly profitable on an ongoing basis.
It remains to be seen who is actually able to buy such an operation, both

from a regulatory perspective and with a view to keeping the business
running. A Russian financial institution sanctioned by the West could
not purchase the operation, and any new owner will need to make sure
that the change in ownership doesn't lead to overly many customers
running away overnight. Outside of Russian buyers, banks from India
or China could also be interested. At last count, Raiffeisen Bank Inter-
national handled 40-50% of the foreign payment transfers involving
Russia. Russia would probably want to preserve – to the degree possi-
ble – the option of using the bank to carry out international business.
Depending on its new owner and new strategy, it may even remain
THE international bank for dealing with Russia, albeit with a stronger
slant towards dealing with India, China, and other parts of the world
that haven't changed their way of dealing with Russia.
Either way, it's now clear that from the perspective of Raiffeisen Bank
International, a sale is the favoured way forward. The bank previously
stated that it didn't want to just walk away from the Russian equity but
get capital back to Austria instead. Such an option is now in the offing.
Whether this'll be at a valuation of EUR 1.8bn or less remains to be

seen. Russia recently worsened the conditions for vendors of foreign
businesses, especially when it comes to converting roubles to foreign
currency and repatriating the proceeds. Raiffeisen Bank International
may not even be affected by this aspect at all, given the vast amount
of foreign currency reserves the bank is sitting on after accumulating
profits for 18 months. However, given the past history, it seems wise to
err on the side of caution. I'd put my expectations on a price between
EUR 1.2-1.8bn, based on a combination of past profitability, current
operational realities, and political factors. Interestingly, the Russian
government will have some incentive to help Raiffeisen Bank Interna-
tional maximise its sales price, as it will receive its exit tax based on a
percentage of the sales price. Who knows, even the full EUR 1.8bn is
not an unthinkable scenario.
What, though, if something comes in the way of such a sale?
19
1 November 2023
Source: Financial Times, 31 October

2023
Spin-off as an alternative
If Raiffeisen Bank International does not get approval to sell or is not
able to get an acceptable price, the plan B will be to give the asset to
shareholders and have them wait for better times.
For this option, too, the bank has done all the preparatory work, includ-
ing engaging with the Western authorities to get a sense if they would
be likely to grant regulatory.
Pursuing this option would entail:
• Creating a holding company in Vienna, with a listing on the Vienna

Stock Exchange.
• Transferring the Russian operation to the new holding company.
• Distributing the shares of the new holding company to Raiffeisen

Bank International shareholders.
While this wouldn't resolve all the pending issues, it would lead to the
following:
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1 November 2023
• The remaining stump of Raiffeisen Bank International would no

longer be burdened by its Russian exposure and likely receive a
re-rating from investors and analysts.
• The stocks of the holding company would have SOME value, com-
pared to the market currently attributing a value of zero to the Rus-
sian subsidiary. Shareholders could then make their own decision
as to when they'd be willing to part from the shares.
• Raiffeisen Bank International could credibly claim to have delivered

on what its various stakeholders have called for, to the degree cur-
rently possible.
As a plan B option, a spin-off would not be a bad alternative at all.
And a plan C?
If Raiffeisen Bank International could pursue neither sale nor spin-off,
it would probably opt for a gradual rundown of its Russian operation.
This would likely take many years, and it would not resolve issues such
as having the freed-up capital stuck in Russia.
Most likely, it would lead to a sale eventually – of whatever business

remains by then.
It's the least attractive option, by far. It'd also keep the stock of Raiffei-
sen Bank International in limbo.
Likelihoods?
Given how far preparations have advanced at Raiffeisen Bank Inter-
national and combined with the recent breakthrough carried out by
Intesa, it seems that the stars may now be aligned for some kind of
transaction to happen.
Personally, I'd put the likelihood for the three scenarios as follows:
Sale: 60% likelihood
Spin-off: 30% likelihood
Rundown: 10% likelihood
But that's just my personal guess. The views of other market partici-
pants will differ.
What I cannot help but notice, though, is that there is always a lot more
going on around these complex situations than is generally reported in
the media.
21
1 November 2023
E.g., while it's widely believed that it's currently impossible to repatri-
ate money from Russia, one of the largest eurozone banks shows that
this is actually doable.
Hungary's OTP Bank (ISIN HU0000061726, BUD:OTP), which I

reported on separately in October 2023, has been able to get money
back from its Russian operation to Hungary. How so? Hungary's larg-
est bank has been less forceful about wanting to leave Russia, and it's
backed up by its national government. The Russian authorities apply a
different standard to OTP Bank because it suits their needs.
Nothing would stop Russia from applying different rules to Raiffeisen

Bank International, too. It looks like, based on self-interest, Russia
should do so soon.
In fact, something like this has already happened, even though few
noticed at the time.
Raiffeisen Bank International started the process to leave Russia in

December 2022. Since then, the bank already got approval to pay EUR
500m from its Russian operation to the Austrian mothership, to repay
outstanding subordinate debt. This transfer happened in June 2023,
i.e. at a time when such a payment was considered to be impossible
(and it's already included in the other calculation in this report).
Despite these developments, the market currently assigns Raiffeisen

Bank International's Russian assets a value of zero. This would be too
low even if this sale didn't come to happen and the bank pursued plan
B instead.
How do all these scenarios and numbers stack up for shareholders?
Chapter 3 will take a look at that.
22
1 November 2023
Chapter 3:
Limited downside but
50-100% upside
• What Raiffeisen Bank International had done before the war to

prepare for such a scenario.
• How the stock's valuation stacks up when excluding the Russian

subsidiary.
• What an initial re-rating of the stock should lead to.
This exit scenario didn't come as a surprise

It may be surprising, but Raiffeisen Bank International had actually
already worked for nine years to prepare for the day when it is forced
to leave Russia.
When Russia invaded Crimea in 2014, Raiffeisen Bank International's

head office in Austria decided to put in place a contingency plan in case
operating in Russia became impossible.
Ever since, the bank has been structured in such a way that no matter
what happened in Russia, the Russian subsidiary would never jeopard-
ise the operation of the rest of the group.
What happened since February 2022 basically confirmed this approach.

Right after the war in Ukraine broke out, Raiffeisen Bank International
had everything ready to reassure the market, the ECB, and the rating
agencies that no matter what happened in Russia, the rest of the group
was not going to be in peril, financially or otherwise.
Measures taken previously included the following:
• There was no significant long-term cross-border funding from the

parent to the subsidiary.
• The head office had a strategic hedging position to secure its rouble-
based capital exposure. (In fact, Raiffeisen Bank International had
23
1 November 2023
overhedged its rouble position and made a windfall gain from the
2022 currency movements.)
• All exposure to Russian risks was contained on the Russian balance

sheet. If the bank was going to lose its Russian equity, it was also
automatically going to rid itself of its exposure.
The combination of these measures kept Raiffeisen Bank Interna-

tional on the front foot when the political circumstances of its Rus-
sian operation deteriorated. Even though the stock market (naturally)
reacted badly to all of these developments, in terms of its operational
and financial exposure, Raiffeisen Bank International had entered this
period better prepared than probably any other Western bank.
Raiffeisen Bank International is well-positioned to reorganise itself in

such a way that it disposes of its Russian interests. It will turn itself into
a strong bank focused on Austria and the Central and Eastern Euro-
pean region only, and this will be its new equity story once the Russian
issue has been cleared.
Rock-bottom valuation
Despite its ongoing profitability, significant market share and strong
capital reserves (see chapter 2), the stock market currently treats Raif-
feisen Bank International's Russian subsidiary as effectively worth
zero. For argument's sake, let's look at the stock's valuation based on
the Russian operation being worthless indeed.
When leaving aside earnings from Russia, the bank should generate
earnings per share of EUR 3.43 in 2024 and EUR 3.74 in 2025. By
2027, earnings should increase to EUR 4.63 per share. Right now, even
when assuming that the Russian business will not contribute anything
Source: Erste Bank, 29 June 2023
24
1 November 2023
to group profits, the stock of Raiffeisen Bank International is trading at

a price/earnings ratio of 3.7 based on 2025 estimates.
Excluding Russia, the bank's book value per share was EUR 36 at the
end of Q1/2023. When assuming the Russian subsidiary is not worth
anything in a sale (or spin-off), the stock has a price/book value of 0.38.
Banks operating in Central and Eastern Europe are currently trading at

a price/earnings ratio of usually 5-7, i.e. significantly higher than the
stock of Raiffeisen Bank International. Evidently, the Russian exposure
weighs heavily on the stock's ratings.
Will this change in the foreseeable future?
A first step that should help catalyse a higher valuation was announced
just a few days before this report came out, and further news should
follow shortly.
Prospect of cash paid out to shareholders

Raiffeisen Bank International had been forced to hold back on its plans
for paying a dividend for 2022. The Austrian banking regulator was not
sure if the bank would still conform with minimum capital requirements
if it wrote off the Russian operation entirely AND paid out a dividend.
This issue just got resolved. On 27 October 2023, the Austrian bank-
ing regulator gave approval for Raiffeisen Bank International to pay
out a dividend of EUR 0.80 per share for 2022. The bank is calling an
extraordinary general meeting for late November 2023 to ensure the
dividend can be paid out to shareholders.
The move highlights an interesting set of figures. Even in the worst-

case scenario of Raiffeisen Bank International walking away from its
Russian subsidiary, its important CET1 ratio would remain above the
13.5% minimum management target and the 11.7% regulatory mini-
mum requirement.
This also opens up the path towards paying a dividend for 2023, which
is estimated will come out at EUR 0.50. From 2024, UBS estimates
dividends to come out at EUR 1.20-1.30 per share, based on a 30-40%
payout ratio. Analysts at Erste Bank estimate a similar dividend of EUR
1.00 for 2024 and EUR 1.25 for 2025. This payout ratio would be
in line with that of other European banks and ensure that Raiffeisen
Bank International's minimum capital requirement remains above the
threshold set by management.
If a sale of the Russian subsidiary took place and yielded more than
zero, every single euro achieved from the sale would be value accretive
for Raiffeisen Bank International. If such a sale yielded the EUR 1.2-
1.8bn that Undervalued-Shares.com estimates is a realistic outcome,
25
1 November 2023
Source: Bloomberg, 27 October 2023
it'd be a major and quite unexpected windfall gain for a bank that cur-
rently has a market cap of just EUR 4.5bn. With 328.9m shares cur-
rently outstanding, such a sale would generate a one-off influx of cash
of EUR 3.64-5.47 per share. Presumably, a good part of that could be
used for paying out a special dividend and/or buying back shares (or
M&A to capitalise on growth opportunities in the Central and Eastern
European region).
Estimating the upside

Without a doubt, the era of Raiffeisen Bank International generating
huge profits from Russia are over. Even if it continued to operate in
Russia, the years 2022 and 2023 benefited from one-off effects that
would not be repeatable anyway. The bank has also already started to
reduce some of its business. E.g., loans in Russia are down 40% since
the war broke out.
However, once the fog surrounding the situation in Russia has cleared,
the market should realise that Raiffeisen Bank International now oper-
ates in an entirely different environment. Almost no one has realised
yet that the Raiffeisen Bank International of 2023 excluding Russia is
26
1 November 2023
more profitable than the Raiffeisen Bank International of 2019 includ-

ing Russia.
How come?
Due to the changed interest rate environment in Europe, the bank's

operations in Austria and Central and Eastern Europe now operate at
an entirely different level of profitability than pre-war and also pre-
pandemic.
Right now, the market is pricing the stock of Raiffeisen Bank Interna-
tional as if the Russian exposure was worth zero. It's also pricing the
rest of the group as if the change in interest rates of the past two years
never happened.
This comes combined with the very real prospect of significant amounts
of cash flowing back to shareholders over the coming years:
• Payout of dividends totalling EUR 1.30 between now and August

2024.
• A potential one-off dividend of EUR 2.50-5.00 from a sale of the

Russian subsidiary.
• A dividend of at least EUR 1 from 2025.
In a best-case scenario, someone buying the stock at EUR 13.70 would

reduce their investment to just EUR 6.40 per share by year-end 2024,
and then continue to receive an annual dividend of >EUR 1 per share
(estimated by Erste Bank to rise to EUR 1.55 for 2027). This would be
equivalent to a >15% p.a. dividend yield on an ongoing basis from a
stable, growing business. It's worth keeping in mind that despite the
developments since February 2022, Raiffeisen Bank International
today is more liquid than ever.
These figures are just orders of magnitude, and there is tax to be taken
into consideration.
However, they illustrate that the stock of Raiffeisen Bank International

is now irrationally cheap.
What has been weighing on Raiffeisen Bank International were primar-

ily the following three factors:
• The market's perception that Raiffeisen Bank International is on

the bad books of organisations such as the US' OFAC and the ECB.
Given that the proposed transaction has already received approval
in principle from these organisations, this issue is likely about to go
away.
27
1 November 2023
• A valuation discount to account for the uncertainty surrounding

the Russian business. Again, given recent progress, this discount
should now start to narrow and eventually fall away entirely.
• The expectation that the subsidiary in Russia would be worth zero.

Recent advances with finding a buyer, agreeing a price that the
bank deemed acceptable, and signing a term sheet are a strong
indicator that this issue is also about to appear in a new light soon.
Where should the stock be trading?
Anything below EUR 15 is probably irrationally cheap.
In the first instance, if a sale or spin-off involving the Russian subsidiary

were to go ahead, the stock should recover to somewhere nearer to
EUR 20. There'll be some positive ancillary effects, e.g. the Russia risk
falling away is expected to save the bank EUR 150m annually due to
lower funding costs.
Before the war, Raiffeisen Bank International had a return on equity

target of 11% p.a including Russia. The 10% that the bank is showing
for this year excludes Russia, and includes provisions for risks in Poland
that amounted to 4.5% of return on equity. In other words, the core of
the business produces 14-15% return on equity this year even without
Russia, compared to the bank's 11% p.a. target pre-war and pre-pan-
demic but including Russia.
European bank stocks are cheap, and Raiffeisen Bank International will
need some time to regain the market's confidence.
However, the bank's exposure to and strong market position in the

Central and Eastern European region give it better growth prospects
than those of most Western European banks.
In that sense, the stock should eventually return to its pre-pandemic

level of EUR 20-25, further supported by the prospect of significant
cash flowing back to shareholders. This would give the stock 50-100%
upside.
A stock needs a catalyst to re-rate, and Raiffeisen Bank International

could soon see several catalysts wrapped into one. In the meantime,
investors are buying into a company that is managed with great fore-
sight and genuine care for maximising shareholder value even when
there is political headwind.
Risks and challenges

Russian approvals: for any transaction involving the Russian subsidiary,
Raiffeisen Bank International will need approval from Russia's banking
regulator and the office of the president. While it should be in Russia's
28
1 November 2023
best interest to see some transaction go ahead, some unforeseeable

factors could influence this decision.
Timeline: as of now, there is no guarantee that any transaction involving

the bank's Russian subsidiary will go ahead in the foreseeable future.
Interest rates: like any other bank, Raiffeisen Bank International is

affected by changes in the interest rate environment.
Taxes: payout of a special dividend with sales proceeds from the sale
of the Russian subsidiary could be tax-free, but there is currently no
clarity on this point.
Windfall taxes in the EU: EU-based banks tend to be very profitable,

and EU countries have recently adopted a tendency to impose windfall
taxes on highly profitable operations.
Austrian politics: Austria is famously corrupt and has experienced

corporate scandals in the past. Raiffeisen Bank International is owned
by a group of state-owned banks. While it's unlikely the bank itself
would engage in corruption, there is always the risk that it unwittingly
becomes a party to an Austrian corruption case or scandal.
29
1 November 2023
Disclaimer
Risk warning and terms of usage:
The material published in this report is part of a website that is a personal blog. Neither the report nor the website is a regulated
financial advisor in any jurisdiction. Most of the investments discussed on this website are part of the personal portfolio of the au-
thor. This website is not issuing any buy or sell recommendations, nor does it publish past performance figures outside of anecdotal
mentioning of the performance of select investments described in past reports.
All of the information contained in this report and its corresponding website, www.undervalued-shares.com, are for information pur-
poses only. Readers should always consult a regulated advisor of their trust before making any investment decisions. This blog and
its articles, research reports, social media postings, media appearances and any related content serve purely to inform and inspire
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This report is not a solicitation or inducement to buy, sell, subscribe or underwrite securities. The author does not make investment
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RESEARCH REPORT

Raiffeisen Bank International owns the most profitable international

Raiffeisen Bank International could be one of the most interesting

Product for Lifetime Members only (USD 999 one-off) – www.undervalued-shares.com

Chapter 1: The reality of owning a bank in 7

Chapter 2: Resolving the strategic challenges 13

Chapter 3: Limited downside but 50-100% 23

Even (Russian) banks

There are exceptions, though.

Sometimes, the stock market logic underlying a bank stock is simply

Take Bank of Cyprus (ISIN IE00BD5B1Y92, UK:BOCH) as an exam-

Unsurprisingly, given Cyprus' reputation as a basket case, a local friend

Just over a year later, the stock is up 122%.

I was convinced that interest by foreign private equity investors and

Today, I'll describe why Raiffeisen Bank International deserves the

Others should soon hear about this opportunity, too, as Raiffeisen

Raiffeisen Bank International is one of those unusual investment cases

The market currently values the Russian subsidiary as effectively worth

Based on Russian regulations for the valuation of such disposals and

On 27 October 2023, Raiffeisen Bank International received regula-

As a fall-back option, Raiffeisen Bank International has prepared a

Because of what has happened in European interest rates, the Raiffeisen

Freed up from the exposure to Russia, the stock of Raiffeisen Bank

The company is due to provide a market update on 3 November 2023.

At prices below EUR 15, the stock of Raiffeisen Bank International

Raiffeisen Bank International at a glance

Source: Erste Bank, 29 June 2023

What you are going to learn in this chapter:

• How Raiffeisen Bank International almost left Russia before it

• Why foreign banks in Russia are so insanely profitable.

• The forces exerting pressure on foreign banks to leave Russia.

A multi-billion profit centre

This wasn't always the case.

Back home in Austria, banking executives and shareholders didn't care:

In 2019, the Russian subsidiary briefly generated a staggering 70% of

Source: UBS, 8 August 2023

Both in absolute and relative terms, its business had succeeded

An Austrian bank specialised in Central and Eastern

As a non-NATO, neutral country with strong historical ties to Central

Its 45,000 employees are servicing over 17m customers across

Source: Raiffeisen Bank International

vides investment banking services and a broad array of corporate ser-

The most remarkable part of its operation, though, long used to be

Why has Raiffeisen Bank International been so profitable?

On 2 January 2020, The Moscow Times provided an in-depth, English-

Trust in Western brands: unsurprisingly, Russian customers put more

Source: The Moscow Times, 2 January

Stuck between a rock and a hard place

A foreign-owned banking operation in Russia will now be under pres-

• Russian sanctions don't allow foreign banks to repatriate profits.

• European sanctions effectively push for Western banks to wind

Source: Radio Free Europe, 29 August

• US sanctions further back up the pressure exerted by the EU and

What's a bank to do?

More news out soon – watch this space

I expect the upcoming release of quarterly results on 3 November 2023

Chapter 2 will provide an outlook based on what is known so far.

What you are going to learn in this chapter:

• How the pressure on Raiffeisen Bank International to exit Russia

• Which main option the bank has been pursuing.

• Why its plan B is not a bad option either.

No way but out

Not unexpectedly, this position proved controversial. At one point,

With this being the working hypothesis, Raiffeisen Bank International