Ukraine’s war risks are not a threat to European banks: European Banking Authority

Vigilant but reassuring: Regulators have been carefully examining the situation of European banks since the beginning of the conflict in Ukraine and the implementation of sanctions against Russia.

The message is clear: for now, banks’ exposure to Russian risk is generally limited, but the war should not drag on too long. On Thursday, March 31, Andrea Enria, head of supervision of the banking sector at the European Central Bank (ECB), pointed to a concentration of risks in certain sectors, in particular those affected by the rise in energy and commodity prices. premiums or by the deterioration of the economic situation. situation in the euro area. So much so that the ECB declares itself willing to intervene “if the risk situation of certain banks deteriorates”.

€88 billion exposure to Russia and Ukraine

On Friday, it was the European Banking Authority’s turn to share its longer-term concerns. If the direct risks to the banking system are not “do not represent a fundamental threat to financial stability”underlines the EBA in a study, the regulator does not hide its concern about the indirect consequences of the conflict, which could weigh on the banks in the longer term.

The banks “will be affected by weaker economic growth” – The growth prospects of the region have been practically halved in 2022 -, underlines the regulator, not to mention the volatility of the markets, supply interruptions and even cyber attacks.

At the end of 2021, European banks reported exposures of €76 billion to Russia and €11 billion to Ukraine, according to the EBA. In France, Société Générale is by far the most exposed, in particular through its banking subsidiary Rosbank. The French group indicated, at the beginning of March, that it will be exhibited in Russia up to €18.6 billionof which 15.4 billion for Rosbank alone.

Two other major European players in the sector, the Austrian bank Raiffeisen and the Italian group UniCredit, are also highly exposed. ING, Deutsche Bank or Intesa are also.

30 to 50% loss on exposures

The truth is that banks will have to face a fall in their profits, after an exceptional 2021 harvest, especially in the fourth quarter, with profits many times higher than those prior to the health crisis. “Economic growth pressures could weaken banks’ business and financial prospects, while corporate banking and investment services revenues are expected to decline. However, retail banking should be more resilient and net interest margins could improve.” warns the rating agency Fitch.

According to the rating agency, a first wave of losses due to direct exposure to Russian counterparties should materialize in the accounts for the first quarter, “with losses that probably represent between 30 and 50% of the amount of the exposure.” However, says Fitch, “in most cases, direct exposures are small and the impact should be cushioned by significant pre-impairment gains”.

For its part, the European rating agency Scope Ratings estimates the absorption capacity of French banks in additional losses at 130,000 million euros, taking into account their stock of provisions constituted in 2020 (precautionary provisions) and their own surplus.

“Banks have the ability to absorb additional credit losses without exhausting their capital positions. And even if earnings don’t reach the exceptional level of 2021, business models are diversified and revenue generation is resilient.”summarizes Nicolas Hardy, head of the banking sector at Scope Ratings.

Depreciate or not?

There remains the thorny question of the depreciation of the subsidiaries’ assets, that is, whether or not to reduce their book value to their market value, that is, to a level close to zero. Interested banks are not required to do so on their quarterly accounts, but only on semi-annual accounts. In this game, it is the first establishment to do so that will impose a rule on the others. Unless the regulator steps in by then to impose a common approach.

For now, few European banks have raised the alarm about their quarterly results. On the other hand, financial analysts are starting to revise down their profit forecasts for 2022. This is especially the case for UBS, which has just cut its profit forecasts for Crédit Agricole SA by 7% and by 5% for 2022. and 2023, due to weaker lending activity in retail banking and lower revenues in investment banking.

But the reviews are far from massive. The publication of quarterly results or billing in the first quarter, at the beginning of May, will therefore have test value.