MILAN, Feb 25 (Reuters Breakingviews) - Western executives watched with horror as Russian tanks rolled into Ukraine on Thursday. Bank bosses like Frédéric Oudéa of Société Générale (SOGN.PA) and UniCredit’s (CRDI.MI) Andrea Orcel have more to fear than most. The 8% fall in the STOXX Euro 600 Banks Index on Thursday and a 3% decline in share prices of American lenders like JPMorgan (JPM.N) reflects a triple whammy of risks.
The selloff is partly down to a gloomier economic outlook. A protracted conflict could push up energy and food prices, dampen consumer confidence and slow the pace of central-bank rate hikes. Money market prices suggest investors now think the U.S. Federal Reserve is less likely to raise policy rates by 50 basis points in March read more . Delays would postpone a much-anticipated windfall for Western banks, whose lending margins improve with higher interest rates read more .
Sanctions present a further problem. Banks in Italy, France and Austria hold $68 billion of combined exposure to Russia as of September 2021, almost five times the total for American lenders, Bank for International Settlements data shows.
Much of that is cross-border lending to large Russian companies. If domestic economic pain mounts or the value of the rouble collapses, Russian borrowers could struggle to repay loans. Excluding Russia from the SWIFT banking network might make it harder for banks like UniCredit and SocGen to collect interest payments. The French group had 3 billion euros of exposure to larger Russian companies at the end of 2020, European Banking Authority data shows, while its Italian rival has about 5 billion euros of cross-border Russian loans. Lenders are already increasing their provisions against potential defaults, one senior banker told Reuters Breakingviews.
A final risk affects Western banks’ Russian subsidiaries. Raiffeisen’s (RBIV.VI) local unit, for example, brought in one-third of its parent’s earnings last year. Those businesses would face heavy losses if the economy tanks. There’s also a danger that Russian authorities respond to Western sanctions on lenders like Sberbank (SBER.MM) and VTB (VTBR.MM) by seizing foreign-owned banks at home. In a worst-case scenario, where lenders had to write off the equity in their Russian subsidiaries, Raiffeisen’s Common Equity Tier 1 capital ratio would fall by 1 percentage point, JPMorgan analysts calculate. The equivalent hit for UniCredit would be at most 40 basis points. Such scenarios are distant right now. But it’s clearly enough to keep investors on their toes.
(The authors are Reuters Breakingviews columnists. The opinions expressed are their own.)
(This column refiles to fix a typo in third paragraph.)
- The United States government on Feb. 24 imposed sanctions on Russia in retaliation for its invasion of Ukraine. The sanctions targeted major Russian banks, including state-backed Sberbank and VTB, as well as wealthy individuals and their families. The U.S. Treasury department said U.S. banks must sever their correspondent banking ties with Sberbank and 25 of its subsidiaries within 30 days.
- In a 10-point sanctions package, Britain said on Feb. 24 it would impose an asset freeze on some major Russian banks, including VTB, and stop major Russian companies from raising finance in Britain.
- European Union foreign ministers will thrash out details on Feb. 25 of sanctions on Russia. European Commission President Ursula von der Leyen said in a tweet on Feb. 25 that EU sanctions will target 70% of the Russian banking market and key state-owned companies.
- Western governments have agreed so far to refrain from cutting off Russian entities from the SWIFT international correspondent network.
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