When Russia invaded Ukraine in February of 2022, Western countries were put to Levy harsh economic sanctions, which greatly restricted the ability of Western companies to do business in the country. Even companies that were not directly impacted were quick to divest or shut down their operations for reputational reasons. According to a study conducted by Yale University, over 1 000 multinational companies have curtailed their operations in that country since the invasion began. For most companies, this was an easy decision.

For example, prior to the war, Apple generated less than one percent of its revenue from Russia. The reputational damage as well as the risk of inadvertently violating sanctions was not worth this tiny percentage of their revenue. However, the same could not be said for Rife Ice and bank with over 200 billion Euros of assets, right? Feisin is the second largest bank in Austria and can trace its roots all the way back to the Austro-hungarian Empire. Following the collapse of the Soviet Union Right Bison, Bank saw a huge opportunity to expand into formerly communist countries which at the time lacked sophisticated Financial system terms.

As one of the first Western Banks to expand into Eastern Europe Right Feison quickly established substantial market share across a former Soviet Bloc with significant operations in Belarus Ukraine and Russia. The outbreak of the Russo Ukrainian War caused severe disruption for Right Bison as Ukraine's economy was severely damaged and both Russia and Belarus have become the target of severe economic sanctions. So you probably wouldn't be surprised to see that their share price declined by roughly 60 in the opening days of the war. But what you may be surprised to hear is that despite these disruptions, Rife Eisen had their best year ever in 2022, with their revenue increasing by 64 percent and their net income increasing by a shocking 164 percent versus 2021..

despite the record profits, the Austrian lender's share prices failed to mount any meaningful recovery. and as of the time of making this video, its price to earnings ratio sits at a seemingly absurd 1.22 times. in this video, we'll take a deep dive into how Rye Faison was able to post record profits despite three of their largest markets being at war with each other and the challenges they'll face going forward. Foreign has been operating in Russia since 1996.

Its Russian subsidiary has 27 billion Euros of assets, hundreds of branches, and over 9 000 employees. In fact, write, Bison's Russian subsidiary is on the Russian Central bank's list of systemically important financial institutions. There is much debate about how badly the Russian economy has suffered as a result of the Western sanctions, as many economists don't trust the economic statistics published by the Kremlin, but even the Russian government admits that they enter into a recession in 2022 with GDP Contracting by 2.1 percent. Normally Banks do poorly during times of recession When people's incomes fall or they lose their jobs.

They're often unable to make their interest payments. This causes elevated credit losses for banks, which decreases profitability. But shockingly, the exact opposite happens, right? Faison In 2022, their profits from Russia increased four-fold to a record 2 billion euros. So how is this possible? Counter-intuitively, the Western sanctions actually helped write Bison most Russian Banks were and from the Swift messaging system, making them unable to process International transactions right.

Bison was not banned from Swift, making them one of the few Banks operating in Russia that could transact. between Rubles and the US dollar or Euro Russian citizens who wanted to take their money out of the country had to use Rifleisen and the Austrian bank charged lucrative fees on every transaction. This was a massive windfall, allowing the bank's profits to Surge. Also, despite the fact that much of Ukraine has been ravaged by War in most areas far away from the front lines, economic activity continues.

People still go to work, pay their taxes, and make their interest payments. So surprisingly, Ryphysen's Ukrainian subsidiary is still operating pretty much business as usual, and was slightly profitable in 2022, generating 65 million euros of net income. In 2022, Rifleison had a record year, generating 3.6 billion euros of net income almost triple of what they made in 2021. The increase was almost entirely attributable to the increased fees from Russian foreign exchange transactions.

However, the situation is not nearly as rosy as these numbers might lead you to believe. Despite the record profits, their share price has failed to recover and their market cap currently sits at 4.6 billion Euros. That's about 1.2 times their 2022 net profit, which seems to be an absurdly low valuation. So why is this the case? Immediately after the Ukraine Invasion began, the Russian Ruble started tanking in value as foreign investors rushed to pull their money out.

In response, the Russian government implemented a number of strict Capital controls aimed at Shoring up the value of their currency. These measures made it nearly impossible for foreigners to take their money out of the country. Specifically, Russian subsidiaries of foreign companies are not allowed to distribute any money to their parent companies. All the profits that write feisins are making in Russia are just piling up with no way for the parent company in Austria to access them.

Currently, the Russian subsidiary has a book value equivalent to 4.1 billion Euros. But how much is 4.1 billion Euros worth if you can't spend it? Nothing. So does this mean that Rifaison's Russian operations are completely worthless? Not necessarily foreign has a few options related to its Russian operations. Firstly, they could wait until the war ends, at which point, hopefully the Russian government will relax the capital controls.

However, this is a very risky strategy. The Kremlin maintains a list of what it considers to be unfriendly countries. While Austria itself is not on the list. The European Union is.

since right. Bison Bank is located within and regulated by the European Union. It is considered to be in an unfriendly jurisdiction. The bridge has already been burned between Russia and the unfriendly countries.

Thus, there is little motivation for Russia to allow companies like Right Bison to ever take their money out. At the same time, Rifaisin is coming under increasing pressure from the U.S and EU Regulators. This past February Reuters reported that the U.S Office of Foreign Asset Control, which is in charge of implementing economic sanctions since a request to ride Faison requesting them to answer questions about their operations in Russia. This information request is not a formal accusation and Rife Eisen says they are fully complying while Reifyson is still legally allowed to operate in Russia The sanction regime makes doing so extremely complicated.

If sanctioned, Russian companies or individuals use Rephysen to conduct foreign exchange transactions, Right, Bison itself could face legal liabilities even if this was not their intention. Given that they can't take their profits out of Russia. Continuing their Russian operations brings regulatory risk with no immediate benefit in return. This leaves Rife Icing with two options: selling their Russian operations to a local buyer or spinning it off as a separate company.

Both plans have certain drawbacks. Foreign companies are allowed to sell their Russian subsidiaries and the sale proceeds can be taken out of Russia. However, the Kremlin has created strict rules for how this has to be done. For companies located in unfriendly jurisdiction such as the EU.

they must sell their Russian assets for 50 of appraised value. Plus, they have to make a 10 contribution to the Kremlin itself. The scheme basically amounts to a cash grab and the asset sales are usually organized by Russian oligarchs with close ties to the Kremlin Rife. Eisen's Russian subsidiary has Book value of about 4.1 billion euros.

In theory, they could sell it for net proceeds worth 40 of that or about 1.6 billion euros, but it is unclear whether the Kremlin would value the assets at Book value in April of 2022. Less than two months after the War began, the French banking giant Society Generality sold its Russian subsidiary Ross Bank to a Russian oligarch. Society generally recognized the 3.2 billion Euro loss on the sale, which is roughly equivalent to its entire book value. So they basically sold it for nothing, but at least allow them to get rid of the their Russian liabilities.

Society Generalities Russian operations represented a small percentage of their overall business, so they were willing to divest it in a fire sale. Rifison has waited longer hoping to eventually get a better deal. A more valid comparison is probably the Telecommunications Company Veon Veon stock is listed in the US and domiciled in the Netherlands, but it operates in neither of these countries. It instead focuses on developing markets in Eastern Europe Central Asia and South Asia.

Similar to Raipaison, Russia is Beyond's single most important Market representing roughly 44 percent of the company's total ebitda. Before the war, they had roughly 12.5 billion dollars of Enterprise Value, which implies the Russian business was probably worth about 5.5 billion in November of 2022, they agreed to sell their Russian operations to its own management team for the equivalent of 2.1 billion dollars, so they received about 40 percent of fair value. That's at least within the ballpark of the Kremlin's formula. If Rife Eisen can get 40 of Book value for its Russia business, this would represent at about 35 percent of the company's current market cap.

The company says they are actively searching for a buyer, but have so far not been successful, and even if they do find a buyer, it's unclear if they'll be able to get a deal as good as what Vion got. It's important to know that the reason why Feison did so well in Russia over the past year is because they had access to Swift. If they were owned by a Russian oligarch, it would be cut off from Swift and immediately become far less valuable. Thus, whatever oligarch ends up buying, it may ask for an even bigger discount to compensate for this risk.

The final option would be to spin off the Russian and Belarusian operations as an independent company. This past May Reuters reported that Rifaison is considering spinning off its Russian assets into a separate entity which will also be traded on the Vienna Stock Exchange. Existing shareholders would each be given one share of the new entity for each share of right fighting that they own. This would insulate the rest of the company from any potential sanctions liabilities.

However, it would likely not solve the problem of Western shareholders not being able to access the Russian profits. The new Russian bank that they spin off would likely be near worthless. right? Bison really doesn't have any good options. The best case scenario appears to be a sale to a Russian Oligarch, but for the reasons we discussed previously, this will likely be at a massive discount.

That's why the stock has failed to recover despite their strong financial performance on paper foreign. It's important to note that while Russia is right Bison's most important Market they still operate in 12 other countries. Russia and Belarus combined made up 55 of their net profit in 2022. Even if they can never get even one Euro out of either of these two countries, they still have the remaining 45 of their business right? Feisin has published an analysis of what they call Price to Book Zero D consolidation scenario.

This is a worst case scenario whereby they lose control of their Russian subsidiary with zero compensation. In this scenario, their common Equity Tier 1 ratio which is a key metric of Bank solvency would decrease from 16 to 13.7 percent. That's still above the regulatory minimum of 11.25 so they would still be solvent and there would be no risk of bankruptcy currently. Rick Bison Bank has about 15 and a half billion Euros Of tangible Book value.

The Russia business has Equity value of 4.1 billion euros. A zero deconsolidation would decrease tangible Equity to 11.4 billion euros. They currently have a market cap of 4.6 63 billion euros, so the bank would still be trading at a significant discount to book value on a price to earnings basis. They made 3.6 billion euros of net income in 2022, of which 2.2 billion came from Russia and Belarus with Russia.

So the rest of the business would have generated 1.4 billion euros of net profit, thus assuming they get nothing from the deconsolidation of Russia and Belarus. Their stock is still trading at less than four times last year's earnings, which is extremely cheap. For full disclosure, this is not investing advice and I personally have a small position in Reiffeisenstock. Alright guys, that wraps it up for this video.

What do you think about Raytheis in Bank Let us know in the comments section below. As always, thank you so much for watching and we'll see you in the next one. Wall Street Millennial Signing out.