The exposure of European banks to Russia, although diminished, remains in the sights of observers. L'Morningstar Dbrs rating agency he monitored in one of his relationship including major banks and their exposures in Moscow Unicredit e Intesa San Paolo. The agency, which changed from Canadian to American in 2019, does not say it is particularly worried on the security front financial risks, but believes that the banks remain highly vulnerable to legal, operational, regulatory and reputational risks linked to exposure to a sanctioned country.
“European banks have reduced their exposure to Russia since the start of the war,” reads the Morningstar DBRS report. “We expect further reductions in the short to medium term, also in light of renewed pressure from regulatory authorities and vigilance”. “We know that banks are exploring various options for a complete exit, including the sale of their local subsidiaries, although we expect this to be a complex and long process"He said Halil Senturk, assistant vice president of the Morningstar Dbrs European Financial Institutions team. “We believe that i financial risks arising from exposure to Russia are manageable for banks, but remain vulnerable to risk of sanctions and fines", he added. Some banks have confirmed having received from European Central Bank the binding order to reduce their exposure to Russia.
The Raiffeisen Bank case
While overall financial risks arising from exposure to Russia are relatively low and manageable, some institutions, such as Raiffeisen Bank, are exposed to higher risks, given the substantial contribution to profits from their activities in Russia, the rating agency says . “In our view, doing business in a heavily sanctioned country continues to have significant implications legal, regulatory and reputational risks for banks” the report says. “It also creates challenges in the compliance management and operational risks. Ultimately, the banks remain highly vulnerable to the risk of sanctions and fines.
Since the beginning of the war, banks have taken measures to reduce their exposure to Russia.
While banks like Société Générale have already left the country, others have remained, but have largely stopped providing new loans and have reduced their exposure both cross-border and local. Raiffeisen has the greatest exposure to Russia with 15% of total RWA (Risk-weighted assets) at the end of 2023, followed by UniCredit Spa and Otp Bank. Other large banks have relatively small exposure (less than 1,5% of total RWAs at end-2023). The exposition of Ing fell to 1,4% of total RWA, while that of Deutsche Bank Ag and Commerzbank Ag is very limited, equal to 0,3% of the total in 2023. Intesa Sanpaolo announced its exit from Russia in February 2024, however the completion of the sale of the local subsidiary is still pending.
Focus on Unicredit: 2023 profits of the Russian branch still increasing
Just this week Unicredit appealed to the Court of the European Union on the ECB's requests regarding its exposure to Russia, asking for clarification on how to proceed in a still nebulous legislative and regulatory framework. But the institute also had to face courts in London and San Pietrobunrgo, thus confirming the risks highlighted by Morningstar Dbrs.
“Since the start of the war, UniCredit's cross-border exposure has reduced by more than 90% and is expected to fall to zero in the medium term” underlines the agency. “Local exposure (loans to Russian clients) also reduced by 76% since the end of 2021, reaching €2,9 billion at the end of March 2024.”
Despite downsizing efforts, the agency still notes, the profits of the Russian branch are increased in 2023 thanks to high interest rates and the reduction of provisions for loan losses. In 2023 it recorded a pre-tax profit of 886 million euros, versus a pre-tax loss of 273 million euros in 2022. “However, we believe that the profit contribution of the Russian subsidiary remain moderate, equal to 7,7% in 2023 (7,4% in Q1 2024),” the agency says. Last May 7, during the presentation of the first quarter accounts, Andrea Orcel, CEO of the Piazza Gae Aulenti institute, underlined that UniCredit's cross-border exposure to Russia has fallen by 91% in two years and the local presence of 67% and that the strategy is to continue to reduce it in an orderly and accelerated way,” he explained. In this way “cross border exposure will be eliminated in the next 12-15 months and the local bank will be significantly smaller” he said.
