Legal Challenges In Russia And Poland Will Hinder Future Profitability

Key Takeaways

• Ongoing legal issues in Russia and Poland threaten net margins and future earnings through increased provisions and litigation costs.
  
• Economic challenges in Austria and Germany and inflation pressures in Central Europe could adversely affect profitability and cost-income ratios.
  
• Strong operational performance and capital adequacy, coupled with expected loan and earnings growth, suggest potential for steady revenue and robust future earnings.

Catalysts

Offers banking services to corporate, private, and institutional customers.

• The ongoing legal proceedings in Russia, particularly the significant court-ordered damages against RBI's subsidiary, pose a substantial risk to future earnings and may require additional provisions, impacting net margins.
  
• Despite the inclusion of provision overlays, risk costs are expected to rise to 50 basis points in 2025 due to challenging economic conditions in Austria and Germany, potentially affecting overall profitability and net earnings negatively.
  
• Continued challenges in resolving legacy legal issues in Poland could result in more litigation provisions, creating a drag on net margins and earnings until full resolution.
  
• The uncertainty surrounding the Russian business, including potential limitations on dividend extraction and ongoing asset sell-off challenges, could limit capital repatriation and impact return on equity in the near term.
  
• While the banking landscape in Central Europe shows promise, inflation pressures and operational costs remain a concern, potentially impacting the bank’s cost-income ratio and squeezing net margins in the short to medium term.

Raiffeisen Bank International Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Raiffeisen Bank International's revenue will decrease by 4.6% annually over the next 3 years.
• Analysts assume that profit margins will increase from 20.2% today to 21.2% in 3 years time.
• Analysts expect earnings to reach €1.6 billion (and earnings per share of €5.14) by about March 2028, down from €1.7 billion today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 5.9x on those 2028 earnings, up from 4.9x today. This future PE is lower than the current PE for the GB Banks industry at 8.8x.
• Analysts expect the number of shares outstanding to remain consistent over the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.81%, as per the Simply Wall St company report.

Raiffeisen Bank International Future Earnings Per Share Growth

Risks

• The core group, excluding Russia and Belarus, reported stable consolidated profits of €975 million year-on-year, indicating strong operational performance that could support revenue stability.
  
• Improvements in fee income and stable net interest income are expected, suggesting potential for steady revenue generation.
  
• The CET1 ratio of the group, excluding Russia, stands at 15%, slightly above guidance, indicating strong capital adequacy that may support continued earnings growth.
  
• The core group's adjusted return on equity is expected to range between 13% and 15%, indicating potential for robust future earnings.
  
• Loan growth is expected to be 6% to 7% in 2025, which could positively impact interest income and overall revenue.

Valuation

• The analysts have a consensus price target of €23.04 for Raiffeisen Bank International based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of €28.5, and the most bearish reporting a price target of just €16.25.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be €7.4 billion, earnings will come to €1.6 billion, and it would be trading on a PE ratio of 5.9x, assuming you use a discount rate of 6.8%.
• Given the current share price of €25.74, the analyst price target of €23.04 is 11.7% lower.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.