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Dangerous tides from Russian sanctions pull on Eurozone bank recovery

Dangerous tides from Russian sanctions pull on Eurozone bank recovery

One of Italy’s major banks, UniCredit, has issued a stark warning that it may have to face losses of about €7 billion in an “extreme scenario” whereby its entire Russian business is wiped out.

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Dangerous tides from Russian sanctions pull on Eurozone bank recovery

The bank announced it has loans of about €7.8 billion in its Russian consumer unit and net cross-border exposure to companies of €4.5 billion, of which about 5% has been hit by western sanctions.

UniCredit also revealed a net derivative exposure to Russian banks of about €300 million and said “the maximum potential loss in the event that the rouble would tend to zero is around €1 billion”.

Alongside France’s Société Générale and Austria’s Raiffeisen Bank, UniCredit has the largest exposure to Russia among international lenders.

Chief executive Andrea Orcel had been examining an acquisition of Russian government-owned lender Otkritie before the invasion but has since scrapped those plans.

“In the extreme scenario, where the entirety of our maximum exposure . . . is non-recoverable and zeroed”, the bank said its common equity tier 1 ratio, a key capital measure, would fall 2 percentage points to about 13%.

Nevertheless, it recommitted to a €1.2 billion cash dividend and a €2.6 billion share buyback so long as its CET1 level remained greater than 13%.

It added that “whilst we do not consider this extreme scenario as our base case, we are taking a prudent and sustainable approach to our distributions”, and said it would provide quarterly updates on the situation.

Orcel stopped short of saying his bank was planning an exit from Russia, previously one of its most profitable regions — unlike Italian rival Intesa Sanpaolo, which has put its operations in Russia under strategic review.

Europe’s struggling banks entered 2022 on a wave of optimism not seen in more than a decade, with interest rates set to rise at last, the COVID-19 pandemic receding, and profits rising. The Ukraine crisis and the imposed sanctions has swiftly knocked that flat.

Russia’s invasion has triggered an exodus of Western companies from the country, sent commodity prices soaring, hammered the euro and even threatened a global recession, just as Europe’s lenders looked poised to re-enter growth mode.

Investors had been cautiously returning to the sector, lured by cheap valuations and the prospect of excess capital set aside during the pandemic being returned as dividends and buybacks.

But capital distribution plans by Italy’s UniCredit appeared to be hanging by a thread this week after it said a write-off of its Russian business could cost €7.8 billion.

The STOXX index of European banks has fallen 15% since the invasion on February 24th, against only a 5% fall in the benchmark STOXX index, making banking one of the worst performing sectors in the region.

Potentially more damaging for European banks in the longer run are the risks of delayed central bank rate hikes, dwindling prospects of returning excess capital to shareholders, and the threat of stagflation, whereby prices rise as growth stalls.

The post Dangerous tides from Russian sanctions pull on Eurozone bank recovery appeared first on Payments Cards & Mobile.

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