RBI’s CET1 ratio rebounds after briefly breaching requirements

The Austrian bank said capital adequacy temporarily fell below the regulatory minimum in May

Raiffeisen Bank International (RBI) managed to boost its core capital ratio by 170 basis points in the second quarter of the year after temporarily dipping below the regulatory minimum in May as its exposures to sanctions-battered Russia came under pressure.

The Vienna-based lender’s Common Equity Tier 1 capital increased 20% to €14.6 billion ($14.9 billion) in the three months to end-June, thanks to a tripling of retained earnings and the sale of Bulgarian operations – elements that added 53bp and 75bp to the CET1 ratio, respectively, more than offsetting a 5% increase in RWAs and other headwinds.

 

 

The bank’s CET1 ratio hit 13.4% at the end of June, up from 11.7% at end-March, or 12.4% when including profits that hadn’t yet been verified as of the end of the first quarter.

The consolidated CET1 ratio as of May 31 dropped below the bank’s 10.5% combined Pillar 1-based requirement, the bank said, before subsequently recovering. RBI attributed this to increased credit risk for its Russian exposures and the belated accrual of Q1 profits to regulatory capital.

 

 

What is it?

Common Equity Tier 1 capital is a bank’s higher-quality capital, the main line of defence to absorb losses. When divided by risk-weighted assets, it gives a bank’s CET1 ratio a key measure of solvency. Banks must meet their minimum CET1 ratio requirements at all times, both at a consolidated level and for each subsidiary where applicable.

In RBI’s case, the Pillar 1 requirements include a base 4.5% as per Basel Committee rules, plus a 2.5% capital conservation buffer, a 0.26% countercyclical capital buffer, a 1% systemic risk buffer and a 1% systemically important institution buffer.

On top of this, the bank is also subject to a 1.24% Pillar 2 requirement and 1.25% Pillar 2 guidance, for a total CET1 requirement of 11.75%.

Why it matters

The fact that RBI’s CET1 ratio dropped below minimum requirements shows how deep the bank’s Russia predicament got, if only temporarily. But its position certainly looks more solid than it did even just three months ago.

Falling short of CET1 requirements can lead to dividend restrictions and enforcement by regulators. RBI didn’t mention any consequence from May’s temporary breach – possibly because it stemmed partially from the formality of profit verification, and the bank voluntarily suspended dividends in March, following the invasion of Ukraine.

At 148bp, the distance to combined requirements, including Pillar 2 ones, are back in the region they were at the end of 2021. And even if push came to shove, a full deconsolidation of Russia operations would cost the bank just 5bp to its CET1 ratio, management told investors. In fact, RBI is counting on recouping 10–40bp of capital adequacy from “liquidity management” actions in Russia.

Much like UniCredit, RBI has defied odds and managed to cauterise its Russian wound, which risked infecting the rest of the group. This will not only please shareholders – whose dividend looks set to be released – but will also ensure the bank doesn’t get buried under yet heftier Pillar 2 requirements in the next round of regulatory assessments.

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