Ukraine/EU banks: when aftershocks are worse than the earthquake

EU banks could should wind down their companies in Russia and Ukraine following the bigger nation’s invasion of its smaller neighbour. On Wednesday, UniCredit of Italy outlined most potential losses of €7bn from Russian operations. France’s BNP Paribas stated it had €3bn of exposures.

However the European banking sector has not dropped 15 per cent in response to dangers as modest as these. As an alternative, the autumn prefigures fears of a European downturn and new, politically motivated curbs on payouts to traders.

Meals and gasoline costs are hovering. Progress is prone to disappoint. The European Central Financial institution, which had been getting ready to boost charges in direction of the again finish of this yr, seems sure to carry hearth. Skinny web curiosity margins are set to remain that manner.

A gaggle of EU banks, together with UniCredit, BNP and Intesa of Italy, had pencilled in dividend and buyback ratios exceeding 100 per cent of earnings this yr. Regulators, petrified of political blowback, will be anticipated to demand better restraint.

UniCredit has confirmed it would pay dividends owed for final yr. Nevertheless it has raised a query mark over plans to start out returning €16bn this yr. The Ukraine conflict already stymied UniCredit’s try to purchase Otkritie, a Russian financial institution now topic to western sanctions. A rumoured takeover of smaller native lender Banco BPM is now unlikely.

The run of dangerous luck afflicting chief government Andrea Orcel may worsen. UniCredit could have to jot down off its total Russian enterprise, comprising €14bn of complete mortgage exposures and €2bn of web fairness. The fee could be 2 share factors of frequent tier one fairness or about €7bn.

Frequent fairness tier one would then fall to 13 per cent. Any decrease, and proposed buybacks of €2.6bn this yr would stall routinely.

UniCredit’s estimated losses from a complete wipeout would eclipse these at Société Générale, which has €19bn of complete counterparty exposures linked to Russia. The French financial institution thinks an identical excessive state of affairs would value it simply 0.5 per cent of CET1, or about €2bn.

Europe’s banks stay properly capitalised. They’ve giant shares of unused provisions constructed up in the course of the pandemic. Potential capital returns for this yr stand at €90bn, roughly cut up down the center between money and buybacks.

The pandemic compelled banks to hoard their largesse. A prolonged battle in Ukraine could depart them sitting uncomfortably on extra capital for simply as lengthy.