Exposure of the financial sector to Russia
The Russian invasion is a tragedy for the Ukrainian people. It will also have far-reaching consequences for global economies, with European banks inevitably affected. But we believe that a sell-off in European bank bonds could create opportunities.
Banks have weathered the COVID-19 pandemic in good financial health, with the strongest balance sheets since the global financial crisis. Banks’ direct exposure to Russia is generally small in absolute terms and relative to global international banking flows, i.e. as a percentage of their total foreign claims (CF). (Display, above.)
Main risk exposures
Risks are concentrated in a few countries: Italy holds about 21% of total outstanding loans to Russia, or 2.5% of all CFs of Italian banks, and Austria has about 14% outstanding loans, ie 3.7% of all Austrian banks’ FCs. Loans from France are also around 21%, but only 0.7% as a percentage of the total CF. No other European economy has Russian CF exceeding 0.4% of its totals.
For specific banks, the largest relative exposures measured as a percentage of revenue are RBIAV (Austria) (OTCPK:RAIFF) at 20%, and UCGIM (Italy) (OTCPK:UNCFF) and SocGen (France) (OTCPK:SCGLF) , both at 4%. European CF exposures to Ukraine are even lower (US$13.5 billion versus over US$120 billion to Russia). Austria and France are the most exposed to Ukraine (RBIAV has a revenue exposure of 6% and BNP Paribas (OTCQX:BNPQF) 0.4%).
In the worst case, banks with local subsidiaries could be forced to cancel their direct holdings, but this would have a relatively manageable impact on their Core Equity Tier 1 (CET1) ratios, even at the most exposed RBIAV.
The proximity of European banks to the conflict and their intermediary role makes them vulnerable to global risk and selling, but we believe that the direct impact on their balance sheets of exposures to Russia (mainly via Russian banks and exporters) will be relatively low. The most important impact will probably come from the setbacks of the European economy related to the crisis: acceleration of inflation (linked to energy) and weaker than expected GDP growth.
For Russian banks, the most damaging sanction to date 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 biggest transactions – energy flows – are unaffected. Even so, the shock to the Russian economy will impact Russian banks in due course.
The crisis is also likely to lead to an escalation in Russian cyberattacks, which remain a serious threat to global banks. We believe that their huge investments in cyber risk management could be tested over the next few months and, in an extreme case, a troubled bank could need government support.
Disruptions from the crisis will likely cause bank bond spreads to widen, but strong credit fundamentals keep us positive. In particular, further price weakness could pave the way for opportunities to buy additional Tier 1 (AT1) bonds from stronger European banks.
The opinions expressed herein do not constitute research, investment advice or trading recommendations and do not necessarily represent the opinions of all of AB’s portfolio management teams. Views are subject to change over time.
Editor’s note: The summary bullet points for this article were chosen by the Seeking Alpha editors.