European banks exposed to Russia conflict: Fitch

Russia’s invasion of Ukraine poses risks to the assets, capital and operations of large banks in Western Europe, warns Fitch Ratings.

In a new report, the rating agency said that European banks are primarily exposed to Russia through their corporate and investment banking operations, and their investment portfolios. As a result, it said that asset quality at some of the region’s big banks will be pressured by the fallout from the conflict.

“The credit quality of these exposures is likely to deteriorate sharply, particularly for the counterparties most affected by sanctions. This could lead to material increases in loan impairment charges at some of the banks,” it said, while adding that these impacts should be cushioned by the banks’ large profits.

At the same time, the decline in the value of the rouble will negatively impact the capital position of banks with Russian subsidiaries, the report said.

Additionally, the sanctions imposed on Russia poses added operational risks to European banks, which must ensure that they comply with the terms of the sanctions, impacting “their ability to manage Russian exposures, including in their trading books,” it said.

In particular, the exclusion of Russian firms from the SWIFT payment system and other impediments will, “affect the counterparties’ ability to repay foreign creditors or to trade in securities,” it noted.

According to data from the Bank for International Settlements (BIS), the big European banks had about US$91 billion in total claims on Russian counterparties as of the third quarter 2021, Fitch reported — including US$41 billion held in local currency exposure, primarily in the Russian subsidiaries of foreign banks.

“Italian and French banks had the largest cross-border exposure to Russian counterparties,” it said.

In particular, Societe Generale and UniCredit have the largest operations in Russia among rated European banks, primarily through their local retail and commercial banking operations.

While both stand to be negatively affected, the impact to the overall banks should be modest, the report suggested.

“Even a full write-off of the two banks’ investments in their Russian subsidiaries in an extreme scenario would have a fairly moderate impact on capital at a group level,” it said — estimating that this would reduce the consolidated common equity Tier 1 ratio at Societe Generale by about 40 basis points and by 15 bps at UniCredit — still leaving both banks well above their required capital levels.

European banks’ exposure to Ukrainian counterparties was less than US$9 billion, Fitch reported.

Among the large French banks, BNP Paribas and Credit Agricole are most exposed to Ukraine through their local retail banking subsidiaries, the report said.

In addition to these direct effects, “Any severe hit on economic growth from the war in Ukraine will weaken the banks’ business and financial prospects,” Fitch said.

James Langton

James is a senior reporter for Advisor.ca and its sister publication, Investment Executive. He has been reporting on regulation, securities law, industry news and more since 1994.