* Q2 profit falls to 120 mln euros vs Reuters poll 144 mln
* Books one-off Q2 cost for Hungary bank levy
* Sees steady 2013 provisioning, interest margin up
* Reiterates that capital increase an option
* Shares up 2.4 percent, outpace bank sector index
(Recasts with comments from news conference)
By Michael Shields
VIENNA, Aug 22 Raiffeisen Bank International
will adopt "painful" cost cuts that include forced
lay-offs, new Chief Executive Karl Sevelda said on Thursday,
reining in the emerging Europe empire that he took over in June.
Presenting his first results as boss after Herbert Stepic
quit in a row over his personal finances, Sevelda took a much
more conservative line than the forceful, ambitious Stepic, who
built the bank into central and eastern Europe's second-biggest
"Compared with our peers there is room for improvement" on
costs, he told reporters. The review "will inevitably bring
painful cuts with it".
Sevelda mentioned back-office functions as one target for
efficiency gains but gave no further details before he presents
the cost cuts proposed by an internal task force to the
supervisory board and staff in late September.
The regional powerhouse spanning 18 markets that Stepic
built during four decades at the bank is less efficient than its
main competitors, Austrian peers Bank Austria and
Erste Group Bank.
Raiffeisen had a cost-to-income ratio of 60.2 percent in the
first half of 2013, compared to 54.9 percent at Bank Austria and
52.8 percent at Erste Group.
Despite ongoing efforts to cut costs, Raiffeisen's
administrative expenses grew 6.5 percent in the period, bloated
by the integration of new Polish unit Polbank and pay rises in
Sevelda said Raiffeisen was scaling back in Hungary,
Slovenia and perhaps Croatia, while focusing on Russia, Poland,
Austria, Romania, Slovakia and the Czech Republic.
Second-quarter group profit fell by a quarter to 120 million
euros ($160 million), missing market estimates as costs rose
more than expected and it took a one-off hit of 20 million euros
for an upfront booking of a Hungarian bank levy.
But its shares rose as it talked up prospects for 2013, net
interest income - its main profit driver - rose and it forecast
its net interest margin would rise rather than stay flat. The
margin grew 42 basis points to 3.06 percent in the first half.
"The key positive surprise is stronger than expected net
interest income that may lead to slight consensus upgrades.
However, the capital overhang remains unresolved," said
Berenberg analyst Eleni Papoula.
Raiffeisen reiterated that a capital increase was an option
depending on market conditions.
It was not in talks with any Arab sovereign funds about
taking a stake, Sevelda said, having said last month that a
Middle East investor would be welcome to help bolster its
Prospects for a share sale - especially after Erste repaid
state aid this month with the help of a 660-million-euro rights
issue - have kept Raiffeisen stock under pressure.
Raiffeisen also has to pay back state aid and private
participation capital of 2.5 billion euros by 2017, on top of
which analysts estimate it needs around 2 billion euros to meet
upcoming capital requirements from regulators.
The shares trade at around eight times 12-month forward
earnings, a discount to Erste's 12 times, according to StarMine,
which weights analysts' estimates by their previous accuracy.
Raiffeisen shares, which touched a year-and-a-half low of
19.87 euros in July, rose 2.4 percent to 26.005 euros by 1233
GMT. The Stoxx European bank index rose 1.8 percent.
Raiffeisen stuck to a forecast that its net provisioning
requirement this year would be similar to that of 2012, but now
said loans and advances to customers would be steady rather than
rise. First-half provisioning rose 17 percent to 469 million.
It lost 65 million euros before tax in the quarter in
Hungary, where banks are tangling with the government which
wants to rewrite loan terms for hundreds of thousands of
Hungarian borrowers who took on Swiss franc or euro debt and
lost out when the exchange rate shifted.
"Things that were under discussion would do massive damage
to the Hungarian banking sector. We're no longer talking about
millions but billions," Sevelda said. "We hope that we can head
off these developments in talks with the Hungarian government."
Raiffeisen said its core tier 1 capital ratio fell to 10.4
percent at the end of the first half from 10.7 percent at the
end of 2012, while its leverage ratio - which measures equity
against total assets - stood at 5.5 percent, well above the 3
percent regulatory minimum.
($1 = 0.7476 euros)
(Editing by Georgina Prodhan and Tom Pfeiffer)