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Raiffeisen's eastern strategy on the line after CEO exit

Raiffeisen Bank International's Chief Executive Herbert Stepic addresses a news conference in Vienna May 24, 2013. REUTERS/Leonhard Foeger
Raiffeisen Bank International's Chief Executive Herbert Stepic addresses a news conference in Vienna May 24, 2013. REUTERS/Leonhard Foeger

By Michael Shields, Angelika Gruber and Georgina Prodhan

VIENNA (Reuters) - The central and eastern European banking empire that Herbert Stepic forged at Austrian lender Raiffeisen may be the casualty of a power struggle at the group exposed by his sudden exit.

Stepic, 66, has depicted his abrupt resignation last month as chief executive of Raiffeisen Bank International (RBI) as a selfless effort to protect the group from damaging publicity about his personal property investments.

In fact, sources say, discord from the provincial Austrian banks that control RBI helped topple the burly banker who made Raiffeisen into emerging Europe's second-biggest lender by aggressively expanding in the post-Communist east.

RBI is 78 percent owned by the unlisted Raiffeisen Zentralbank group, which is in turn controlled by eight provincial Austrian banks known as landesbanks.

The landesbanks are themselves owned by hundreds of small cooperative Raiffeisen banks forming the Raiffeisen system.

Revelations that Stepic used letterbox firms in the British Virgin Islands and Hong Kong to buy apartments in Singapore offered a chance for the provincial banks to challenge, and perhaps unwind in part, his eastern expansion campaign in order to retrench and build up capital, the sources said.

Stepic has denied any wrongdoing in using front companies for the deals, which are being investigated by the bank, Austria's central bank and financial markets regulator, and said he always acted in line with tax rules.

With RBI's supervisory board due to pick his successor on Friday, the group's strategy is on the line as its owners seek to shift power back to the center and rein in its high-flying eastern reaches.

"They were looking for an opportunity to get rid of him in a way that would not come back to them," one Raiffeisen veteran who asked not to be named said of the landesbanks.

Knives were out for Stepic even before his property deals were revealed by Offshore Leaks, a journalism project that investigates the owners of secretive offshore trusts.

"Stepic wasn't liked. This move was absolutely overdue. Offshore Leaks was just an excuse," one Stepic confidant added.

Disputes had previously flared about a potential rights issue, dividend payments, the repayment of Austrian state aid during the 2008/09 financial crisis and Raiffeisen's push into former Soviet countries and Asia, the first source said.

Josef Stampfer, head of a grassroots group that promotes the interests of 50 local Raiffeisen cooperative banks, said lenders were concerned about allocating resources to Raiffeisen's relatively risky and far-flung network.

"In the Raiffeisen sector at the moment there is simply a big conflict: more central or more decentral," he said.

The official organ representing the fragmented network of local Raiffeisen banks declined comment.

Raiffeisen is one of the few foreign players to thrive in Russia. There are concerns about its exposure to a market rife with credit risk, legal risk and corruption.

Stepic's takeover of Polbank to boost business in Poland just as debt rating agencies were warning Austrian lenders on their exposure to central and eastern Europe ruffled feathers.

Austria's Financial Market Authority also investigated him last year over a real estate deal in Serbia, but took no action as the investigation showed he had withdrawn from the project.

So when the Offshore Leaks news broke last month, some of Stepic's internal adversaries saw their chance.

Stepic had become even more powerful when Raiffeisen's most senior figure, Christian Konrad, stepped down last year.

Konrad epitomized Raiffeisen, a group synonymous with Austria's rural Catholic heritage. He had been the hunt master in Raiffeisen's heartland of Lower Austria for 21 years and was a prominent promoter of pilgrimages and church restorations.

"Stepic ... felt a strong counterpart was missing. He was more forceful," the veteran banker said, adding that this had tested ties with Stepic's boss, RBI Chairman Walter Rothensteiner.

RISKY EMPIRE?

Stampfer said some local banks' biggest worry was that new international rules on the capital that banks must hold would leave them short of resources to lend locally as usual.

"Our hope is to change the sector's business policy to focus more strongly on the domestic market. Raiffeisen Bank International is a risk investment that belongs on the capital markets, not one that the Austrian economy and certainly not one that the local banks can support," he said.

He suggested the Raiffeisen partners should control just 30 percent of RBI and have the rest in free float.

Up for debate is whether to reverse Stepic's vision and focus instead on Austria and its close neighbors.

That could mean selling off foreign assets like the booming business in Russia, which in effect made all of RBI's first-quarter profit of 157 million euros.

"There are those who think now is the best time to sell (Russia) because you probably get the highest valuation right now," the Raiffeisen veteran said, estimating it could go for twice book value or more than 3 billion euros.

Keeping it without investing in its growth, however, would eventually see it drop out of the top 10 Russian banks in a market that could falter if a global shale gas boom undermines Russia's economy, which is built on energy exports, he added.

Eleni Papoula, an analyst at Berenberg Bank, said a sale price equal to book value was more realistic.

"If Raiffeisen were to sell its Russian business at a similar multiple to (Russian savings bank) Sberbank, then it could get up to 1.7 billion euros."

"If it does sell Russia, its pretax profit might almost halve. I'm not sure it can afford to do that at this stage without tangible evidence that the other geographies are picking up," she said.

An RBI spokesman said talk of selling the Russian business was "nonsense. This is definitely not on the agenda."

NO HISTORY OF DIVORCE

Just whom Raiffeisen will tap to lead its transformation should be decided on Friday, when the RBI supervisory board meets in a 14th-floor conference room overlooking Vienna.

It is the same room where a drawn-looking Stepic announced to reporters on May 24 he was stepping down.

In the hallway just outside hangs a large crucifix, symbol of the conservative Christian roots at the bank inspired by 19th century German social reformer Friedrich Wilhelm Raiffeisen.

Even now, financial sector executives joke that the best profile for a Raiffeisen career is a Roman Catholic hunter with no history of divorce.

Raiffeisen has given no clues on who will replace Stepic, who declined to be interviewed for this story. RZB also declined comment.

People familiar with the organization suggest Deputy CEO Karl Sevelda, the 63-year-old head of corporate clients, could take the job on an interim basis, but didn't fit the bill to take it permanently.

"Karl is a banker's banker, and he was always on the client side. He's an extremely charming person. He's not this Roman Catholic, hunter/farmer-style person. He's too liberal," said the long-time Stepic associate.

Sevelda shares some of the landesbanks' views on expansion and capital usage, the first Raiffeisen executive said.

Rothensteiner, the chairman, is also mentioned as a possible caretaker CEO until a longer-term successor can be groomed.

Insiders say Stepic had been readying Chief Financial Officer Martin Gruell, 53, for the job. Gruell has long experience in the bank's central and eastern European markets, but his close alignment with Stepic's views and strategy argue against him if a revolt is already brewing.

Chief Risk Officer Johann Strobl, also 53, seems to lack support from the grassroots and may have the wrong job to jump to the top at this stage, people close to the group say.

Berenberg's Papoula said Raiffeisen needed an outsider as CEO but would most likely keep the search in-house.

"An internal candidate ... may continue on the current path of opportunistic growth supported by a weak balance sheet. An external candidate may bring a more pragmatic approach and prioritize capital, but could take longer to learn the ropes."

(Editing by Carmel Crimmins and Will Waterman)

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