On the stock market, banks have particularly suffered from the conflict in Ukraine and the sanctions targeting Russia. Societe Generale or Citigroup could suffer significant losses because of their Russian subsidiary. But investors fear above all a lasting impact on the profitability of the sector.
Besides the economy in general, the European banking sector is also worrying due to the threat of major financial losses. Russian oil giant Rosneft has already redeemed a late $2 billion bond issue, according to Bloomberg. And the threats of payment defaults (non-reimbursement of debts and non-payment of interest) are more and more concrete. Fitch Rating has reduced its rating on Russia to C, synonymous with “imminent default”. Moody’s moved to Ca, meaning “highly speculative with near or probable default, but some possibility of recovering principal and interest”. The Kremlin also announced the color by unveiling a list of “hostile countries” whose creditors (bondholders, etc.) can be reimbursed in rubles, a currency that continues to lose value on the foreign exchange markets.
Besides the economy in general, the European banking sector is also worrying due to the threat of major financial losses. Russian oil giant Rosneft has already redeemed a late $2 billion bond issue, according to Bloomberg. And the threats of payment defaults (non-reimbursement of debts and non-payment of interest) are more and more concrete. Fitch Rating has reduced its rating on Russia to C, synonymous with “imminent default”. Moody’s moved to Ca, meaning “highly speculative with near or probable default, but some possibility of recovering principal and interest”. The Kremlin also announced the color by unveiling a list of “hostile countries” whose creditors (bondholders, etc.) can be reimbursed in rubles, a currency that continues to lose value on the foreign exchange markets. Faced with this latent financial collapse of Russia, the banking sector is in a hurry to shed light on its exposure. Very quickly, it became apparent that those with the most to lose are Raiffeisen Bank International, Société Générale and UniCredit in Europe, as well as Citigroup in the United States. These financial groups have subsidiaries active in retail banking in Russia and therefore have a large loan portfolio on the spot. It is also much more difficult for them to imitate Goldman Sachs, which has announced that it is closing its activities in Russia, where it is mainly present for market transactions or international clients who are increasingly numerous to leave Russia. At the beginning of the month, the Austrian bank Raiffeisen thus denied wanting to leave the country of Vladimir Putin. On the other hand, Citigroup intended to withdraw from Russia and had put its local subsidiary up for sale, but the finalization of the operation seems almost impossible, the interested candidates being Russian banks today under sanctions. Even less exposed, most other banks are currently not planning to leave Russia, like Deutsche Bank. According to the latter’s financial director, James von Moltke, the cessation of activities in Russia is not an option “for practical reasons”. On the Societe Generale side, there is no question of (voluntarily) cutting ties with Russia either. The French bank, on the other hand, declared itself “fully capable of absorbing the consequences of a possible extreme scenario which would affect the property rights over its banking assets in Russia”. Concretely, Societe Generale estimates that an outright expropriation by Moscow of its Russian subsidiary Rosbank would reduce its core capital ratio (CET1) by 50 basis points. It would thus drop from 13.7% to 13.2% based on the group’s figures for the end of 2021, still well above the regulatory minimum of 9%. For UniCredit, the blow would be a little harder. “In the extreme scenario, if all of our maximum exposure is sunk and reduced to zero,” the Tier 1 capital ratio would fall from 15.03% to just over 13%. The Italian group insists however on the fact that this would not call into question its dividend forecast, nor its own share buyback program of 2.58 billion euros. Raiffeisen has already announced the suspension of its dividend. Proportionally, its Russian subsidiary is indeed much larger, accounting for nearly 10% of its assets and a third of its profits in 2021, according to the Wall Street Journal. The Austrian bank had already seen its results fall into the red in 2014 during the annexation of Crimea by Russia. But Raiffeisen, which could be very affected, is clearly the exception. According to the Bank for International Settlements (BIS), the overall exposure of Western European banks to Russian counterparties is $91 billion, or just 0.2% of their total assets. On the other hand, the indirect impact of the war in Ukraine could be much greater for the banking sector. Soaring energy prices raised the specter of stagflation, combining high inflation and sluggish growth. A potentially very harmful prospect for banks. Oblis analysts explain that the scenario of stagflation “raises fears of failures for the companies most exposed to the consequences of the war and the repercussions of the sanctions on their activities”. With soaring prices for agricultural commodities, metals or energy, some companies may not be able to raise their selling prices enough to offset the additional costs, putting their margins and potentially their solvency at risk. However, the impact remains impossible to estimate at the present time, depending above all on the evolution of the conflict in Ukraine. But the banking sector has some leeway. The provisions for credit losses constituted due to the pandemic risk have not had to be mobilized, as business bankruptcies have even fallen over the past two years. Compared to the 2008 crisis, banks have also greatly strengthened their capital, which serves as a buffer in the event of major losses. According to data from the European Central Bank (ECB), the CET1 core capital ratio was 15.5% at the end of September for European banks. Almost double the situation in mid-2007, before the subprime crisis, despite a stricter definition of equity. Should we conclude that the recent fall in European banking stocks only reflects panic among investors? This would be to omit the second indirect impact of the war in Ukraine on the sector: interest rates. The surge in inflation in recent quarters has boosted rates as central banks globally tightened their monetary policy to prevent prices from spiraling too quickly and overheating the economy. The yield on the 10-year Bund, the benchmark long-term rate in Europe, had thus rebounded from -0.5% in August 2021 to +0.3% in February. Higher rates bode well for the banking sector, which can thus hope for an upturn in its net interest margin, ie the difference between the interest generated by the loans granted and the cost of its financing. In addition, an increase in ECB rates would allow European banks to escape the negative deposit rate (currently -0.5%) that they must pay on their excess liquidity. Based on the 803 billion euros deposited by European banks with the ECB as of March 9, this represents a theoretical cost of 4 billion euros per year. But the threat of an economic slowdown has recently slowed the rise in market yields and central banks in their desire to raise their key rates. Despite the very high inflation, the ECB thus decided last week to give itself more time before raising its rates because of the war in Ukraine. Christine Lagarde, President of the ECB, said the timing would depend “on the data”. The Frankfurt institution will therefore be careful not to break the economy by raising its rates. In other words, the prospects for bank profitability are now doubly dependent on the evolution of the economic situation: through a possible rise in credit losses and the (interrupted) recovery in interest rates and the net margin of ‘interests. This worries the markets much more than a threat to the solvency of banks or the fear of a new financial crisis. This uncertainty about future profitability also explains why an American bank exposed to Russia like Citigroup was less sanctioned on the stock market than a European bank with very little exposure like KBC. At the economic level, the United States is much less threatened than Europe by Russia, in particular not being dependent on it for its gas supply and generally maintaining fewer commercial links. Even if the decision has not yet been announced at the time of writing these lines, everything leads us to believe that the US Federal Reserve will have raised its key rates for the first time on Wednesday.