When wildly differing outcomes appear equally likely, investors use the shares of businesses close to the action for proxy betting. Raiffeisen is a striking example. The Austrian bank is exposed to Russia, which the west will hit with sanctions if it invades Ukraine. Its shares led European stocks sharply lower on Monday amid chatter of imminent military action. They featured in a small rally on Tuesday after signs of Russian de-escalation.
Vaguely dovish cooing between premiers Vladimir Putin and Olaf Scholz of Germany does not amount to a rapprochement. Meanwhile, any blow would come indirectly, via steeper energy prices. Raiffeisen is unusual in operating directly in Russia, rightly regarded as a disreputable market by most western businesses. Société Générale and UniCredit are the biggest European banks that ply a trade there. But loans and deposits in the country are less than 3 per cent of the total at each lender.
In contrast, about 12 per cent of Raiffeisen’s assets and 20 per cent of its equity are in the region. It has been lending to customers there for more than two decades. The incentives are high interest rates, good profits and low debt levels.
Returns on equity are astonishing, measured by the wretched standards of European banking. The figure for the eastern Europe division, which includes Ukraine and Belarus, were 27 per cent last year. Dividends taken out of the region of €1.3bn over the past five years equate to a yield of roughly 10 per cent.
But it still faces steep political risks. Raiffeisen suffered in 2014 when Russia invaded and then annexed the Ukrainian region of Crimea. Its shares lost more than 60 per cent of their value and the bank made a loss.
Good returns on equity mean that even after recent declines, its shares remain 55 per cent higher over 12 months, outperforming the sector. Yet the shares trade at a 30 per cent discount to book value. Local peer Erste Bank focuses on eastern Europe but avoids Russia. It makes similar returns but trades at a 10 per cent premium to book.
Sunk costs and good profits keep Raiffeisen in Russia. But the implicit discount in its share price — and premium on its cost of capital — makes one thing abundantly clear. Western businesses active in Russia are already subject to sanctions, albeit imposed by the market rather than the US and EU.
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