DealZone

HSBC analyst Johannes Thormann suggests an elegant way for Raiffeisen International, the Vienna-based No.2 bank in emerging Europe, to sell new shares this year. While the bank is relatively well capitalised for the time being, with core Tier 1 at 8.7 percent at the end of Q3, this was only thanks to a 1.25 billion euro injection from its unlisted 70-percent parent RZB, which passed on some of the Austrian government capital it received itself last year.

It was a shareholder-friendly idea of RZB to inject 600 million euros of this capital by way of non-voting “participation rights” which didn’t dilute shareholders at a time when the share price was battered because of lingering concerns eastern Europe was facing a financial meltdown. (The remaining 650 million euros are a straight Tier 1 hybrid.) But the flip side was that those participation rights carry a steep 10 percent coupon that goes out after the net profit line, i.e. is after taxes.

In a research note initiating his coverage of Raiffeisen, Thormann says that using a 10-percent share issue (which, as it happens, works out as roughly 600 million euros at current prices) to repay the participation rights would therefore actually increase earnings per share:

“We have not factored in any capital increase but could easily imagine a 10% capital increase in 2010 in which Raiffeisen International would use the proceeds not to boost its Tier 1 ratio but to pay back the EUR600m Genussrechte (participation rights). This move, which would also effectively strengthen the capital position of RZB Group, would not imply a 10% EPS dilution. Rather it would be 10% EPS accretive in 2010e and just 1% EPS dilutive in 2011e as the 10% after-tax coupon on the EUR600m Genussrechte would fall away.”