Eastern European Instability Will Erode Banking Margins

Key Takeaways

• Exposure to geopolitical and regulatory instability, especially in sanctioned regions, poses ongoing risks to asset quality and increases the likelihood of costly compliance and legal actions.
  
• Competitive pressures from fintechs and subdued loan demand threaten traditional revenue streams and make sustained earnings growth increasingly challenging.
  
• Stability and growth are supported by strong capital buffers, successful risk reduction, digital expansion, and favorable economic trends in core Central and Eastern European markets.

Catalysts

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

• The ongoing geopolitical instability in Eastern Europe, especially due to the company's exposure to Russia and Ukraine, presents a significant risk of further asset write-downs, disruptions to cross-border operations and regulatory actions. The recently enforced legal judgments and asset withdrawals totaling nearly 2 billion euros underscore the likelihood of prolonged financial volatility and impairments that could materially weaken long-term net earnings and book value.
  
• Prolonged and intensifying regulatory pressure related to sanctioned regions, particularly Russia, may force the bank into future divestitures at unfavorable terms, trigger further large-scale asset freezes, and require substantial increases in compliance spend. This is expected to weigh heavily on operational costs and compress future net margins.
  
• The rapid acceleration of digital transformation and the entry of nimble fintech disruptors in key Central and Eastern European markets threaten to erode traditional revenue streams as migrating customers seek lower fees and more agile offerings. Raiffeisen's ability to keep pace with innovation is uncertain, risking persistent declines in fee income and long-term revenue growth.
  
• The subdued loan growth outlook-driven by sluggish corporate demand, weak macroeconomic trends in Austria and CEE, and heightened competition for retail and corporate deposits-suggests the bank will struggle to deliver sustained top-line expansion. This stagnation is likely to limit the potential for organic earnings growth and may put downward pressure on return on equity over time.
  
• Escalating regulatory and compliance costs in Europe, including Basel IV, anti-money laundering, and ESG-related requirements, are expected to drive structurally higher operational expenses industrywide. For Raiffeisen, these ongoing burdens, alongside significant legacy legal provisions, will likely continue to inflate the cost-to-income ratio and erode net profitability long-term.

Raiffeisen Bank International Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on Raiffeisen Bank International compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming Raiffeisen Bank International's revenue will decrease by 5.7% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from 20.7% today to 21.6% in 3 years time.
• The bearish analysts expect earnings to reach €1.6 billion (and earnings per share of €4.85) by about July 2028, down from €1.8 billion today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 5.6x on those 2028 earnings, up from 4.5x today. This future PE is lower than the current PE for the GB Banks industry at 9.9x.
• Analysts expect the number of shares outstanding to decline by 0.16% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 9.68%, as per the Simply Wall St company report.

Raiffeisen Bank International Future Earnings Per Share Growth

Risks

• Continued economic growth and income convergence in Central and Eastern Europe, combined with resilient retail loan demand and retail deposit inflows, could drive higher revenues, net interest income, and ultimately lift earnings for Raiffeisen over the long term.
  
• Expansion and digitalization of banking services in core CEE markets, along with ongoing cost discipline and efforts to keep the cost/income ratio steady, could help reduce operational costs and improve net margins, supporting profitability even as industry competition rises.
  
• The successful exit from high-risk markets such as Russia, while already ahead of regulatory derisking requirements and potentially facilitated by geopolitical developments, could reduce future earnings volatility and regulatory risk, supporting the stability of the group's net income and capital position.
  
• Robust capital and liquidity positions, with CET1 ratios above 15% even under conservative scenarios and the implementation of CRR3 capital relief measures, provide a strong cushion for absorbing shocks and support confidence in the bank's ability to sustain dividends and grow book value.
  
• Increasing regulatory harmonization within the EU, favorable macro trends such as wage growth and strong labor markets in the region, and the ability to capture above-market loan growth in countries like Slovakia, Czechia, and Romania, could fuel top-line revenue growth and sustain long-term earnings momentum.

Valuation

• The assumed bearish price target for Raiffeisen Bank International is €20.6, which represents the lowest price target estimate amongst analysts. This valuation is based on what can be assumed as the expectations of Raiffeisen Bank International's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of €30.5, and the most bearish reporting a price target of just €20.6.
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be €7.3 billion, earnings will come to €1.6 billion, and it would be trading on a PE ratio of 5.6x, assuming you use a discount rate of 9.7%.
• Given the current share price of €24.56, the bearish analyst price target of €20.6 is 19.2% 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.