Russia’s invasion is a tragedy for the Ukrainian people. It will also have far-reaching consequences for world economies, with Europe’s banks inevitably impacted. But we believe a sell-off in European banks’ bonds could create some opportunities.
The banks have come through the COVID-19 pandemic in good financial shape, with balance sheets their strongest since the global financial crisis. Banks’ direct exposure to Russia is mostly low in absolute terms and compared with global international bank flows, i.e. as a percentage of their total foreign claims (FCs). (Display, above.)
Principal Risk Exposures
Risks are concentrated in a few countries: Italy has about 21% of all outstanding loans to Russia, accounting for 2.5% of all Italian banks’ FCs, and Austria has roughly 14% of outstanding loans representing 3.7% of all Austrian banks’ FCs. France’s loans are also around 21%, but just 0.7% as a share of total FCs. No other European economies have Russian FCs exceeding 0.4% of their totals.
For specific banks, the largest relative exposures measured by percentage of revenue are RBIAV (Austria) at 20%, and UCGIM (Italy) and SocGen (France), both at 4%. European FCs exposures to Ukraine are even smaller (US$13.5 billion versus over US$120 billion to Russia). Austria and France are most exposed to Ukraine (RBIAV has a 6% revenue exposure and BNP Paribas 0.4%).
In a worst case, banks with local subsidiaries could be forced to write off their direct equity interests, but this would have a relatively manageable impact on their Core Equity Tier 1 (CET1) ratios, even at the most exposed RBIAV.
European banks’ proximity to the conflict and intermediary role make them susceptible to headline risk and sell-offs, but we think the direct impact on their balance sheets from Russia exposures (mostly via Russian banks and exporters) will be relatively low. The bigger impact will probably stem from crisis-related setbacks to the European economy: accelerating (energy-related) inflation and lower-than-expected GDP growth.
For the Russian banks, the most damaging sanction so far is their exclusion from the international payments cooperative, SWIFT. The US, UK, Canada and the EU have banned seven Russian banks, but those handling the most important transactions—energy flows—are unaffected. Even so, the shock to Russia’s economy will impact Russia’s banks in due course.
The crisis also risks an escalation in Russian cyberattacks, which remain a grave threat for global banks. We think their huge investments in cyber risk management may be put to the test over coming months, and in an extreme case a stricken bank might need government support.
Crisis disruptions will likely drive banks’ bond spreads wider, but strong credit fundamentals keep us positive. In particular, further price weakness could surface opportunities to buy stronger European banks’ additional tier 1 bonds (AT1s).
Related: The Long View: Russia-Ukraine War Has Lasting Implications for Investing