Russia fallout hits US$7b for European banks pulling back

EUROPEAN banks are counting the rising cost of Russia’s invasion of Ukraine as they prepare for a wave of defaults that several fear will spread to the wider economy.

Led by Italy’s UniCredit, the industry has ratcheted up the amount of cash set aside to cover doubtful loans by the most in over a year. Alongside trading losses, writedowns and costs to exit the country, European lenders have so far flagged a hit of about US$7 billion - with the potential for more to come.

The economic impact of the war is already cascading across the world as commodity prices spike and corporate supply chains are disrupted. After years of benefiting from rapid growth in Russia, European banks are now asking themselves if it is still worth doing business in the world’s most sanctioned country. At the same time, they are also divided on how broad the damage to the economy will be, meaning some banks face further costs if defaults spike.

As banks grapple with the uncertainty surrounding the broader economic damage, chief risk officers of several major European lenders are holding meetings among themselves and with regulators to discuss provisioning and other fallout, according to people familiar with the matter. One regulatory official, who spoke on condition of anonymity, said banks will probably stash more funds in coming quarters. 

UniCredit said on Thursday (May 5) that it is “positioned to incorporate possible spill-over macroeconomic effects” in its wider business thanks to its “strong” capital levels, asset quality and “sizeable overlay” on top of normal loan loss reserves. The Milan-based lender, one of the European banks with the biggest presence in Russia, earlier on Thursday took a 1.85 billion euro (S$2.7 billion) hit related to the country as it weighs whether to exit.

Other lenders, including Deutsche Bank, are focusing their provisioning more on Russian loans. The German lender said it considers it to be an “unlikely downside case” that supply chain bottlenecks translate into losses. Societe Generale’s central scenario is for a “soft landing” for the economy, chief executive officer Frederic Oudea said in a Bloomberg TV interview. He cited “monetary policy in Europe which will be very progressive”.

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The French bank last month agreed to sell its Rosbank PJSC unit to the investment firm of Vladimir Potanin’s, Russia’s richest man, taking a hit of about 3 billion euros to exit. Oudea said on Thursday that it would be reflected in second-quarter results.

Still, banks are prodding clients and drilling deep into their balance sheets to see which may have trouble paying back loans as the fallout widens. Raiffeisen Bank International, a big lender in eastern Europe and one of the largest foreign banks in Russia alongside UniCredit, highlighted 1.8 billion euros of exposure to car parts and equipment and 1.2 billion euros related to chemicals and fertiliser industry as being most at risk.

Meanwhile, banks are also divided on whether to quit Russia altogether. UniCredit and Austria’s Raiffeisen are still weighing their options, with Raiffeisen saying on Wednesday that its received interest from parties interested in buying its Russian business. Lenders with smaller outposts are already winding down in the country.  BLOOMBERG