Banks betting on Russia are facing a new appetite test

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Western banks are used to political turmoil in Russia. Société Générale, which was first established in the country 150 years ago, was forced to take a 56-year hiatus after the 1917 Bolshevik Revolution.

Since returning, the French lender has managed the end of communism, Russia’s bankruptcy in 1998 and the annexation of the Crimean Peninsula in 2014.

Now that Russian troops are massing on the Ukrainian border, SocGen was one of the banks reported by the European Central Bank earlier this month. The Financial Times said this week that the ECB had warned lenders with exposure to Russia to prepare to impose international sanctions on the country if Ukraine were attacked.

Besides SocGen, the Austrian Raiffeisenbank and the Italian UniCredit are among the European banks with the largest activities. The trio together account for 3.7 percent of assets in the Russian banking system, according to data compiled by JPMorgan.

Their presence contrasts with some of Wall Street’s largest banks, including JPMorgan and Bank of America, which significantly reduced their exposure to Russia following the Crimea invasion.

As a result, the Kremlin is pursuing a “Fortress Russia” strategy to reduce its reliance on foreign funding. Corporate loans from foreign lenders have plummeted from $150 billion in March 2014 to $80 billion last year, according to the Central Bank of Russia.

However, the cross-border connections remain important. Data from the Bank for International Settlements shows that international banks, including their Russian subsidiaries, are owed $121 billion from Russian authorities. Lenders in Italy, France and Austria each have the most claims.

For the remaining lenders, including the Hungarian OTP Bank, the Russian market still has its charms. Retail banking margins are attractive, while lucrative trading, financing and advisory fees can be achieved, particularly in the country’s energy and commodities sectors.

Indeed, UniCredit chief Andrea Orcel said on Friday that the Italian lender was exploring a takeover of Russian state-owned lender Otkritie before political tensions over Ukraine escalated.

UniCredit, Italy’s second largest bank, entered the Russian market in 2005 by buying Bank Austria, which already had a Moscow-based subsidiary.

Information requested by the ECB included how banks analyzed their exposure to Russia and the contingency plans they were preparing in the event of sanctions.

Several European banks with operations in Russia said they were preparing ahead of the ECB’s warning.

“We don’t need regulators asking us how we manage risk so we can take action,” the CEO of a European bank told the FT.

“If you follow the news, you will definitely be looking at your exposures. Whenever there is geopolitical tension and economic uncertainty, constantly review your portfolio.”

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A senior executive at a European bank with a major Russian subsidiary said it had ramped up its preparations over the past three weeks, significantly increasing its liquidity in anticipation of anxious customers withdrawing money. It has also tripled currency hedging on its Russian exposure, they said.

After the bank was hit hard in 2014 when Russia threatened fines over Crimea, the bank included clauses in all of its loan agreements in the country, preventing sanctioned customers from taking out additional loans and having to repay existing loans. said the executive. The bank had also made provisions for possible losses from any sanctions and was able to hold back further reserves.

Other banks contacted by the FT said they were in “wait and see mode” as efforts continued to resolve tensions through diplomacy.

One U.S. bank that has stuck with Russia is Citigroup, which issued $5.5 billion in loans, securities and other assets at the end of the third quarter of 2021. This corresponded to 0.3 percent of the balance sheet total.

Last April, Citigroup CEO Jane Fraser said the bank was listing its retail stores in Russia along with those in a dozen other countries. Citi declined to comment.

Although SocGen said it made its first investment in a Russian company in 1872, the bank’s €2.6 billion exposure to the country today is mostly through its Rosbank subsidiary. It bought 20 percent of Rosbank in 2006 and took majority control two years later during the financial crisis.

JPMorgan estimates that the company accounts for 3 percent of SocGen group’s revenue and 4 percent of its pre-tax profit.

“Given SocGen’s exposure to Russia, this has the potential to cause more volatility than the sector on geopolitical developments in the region,” said Azzurra Guelfi, an analyst at Citi.

SocGen played down the risk of its Russian involvement, saying that “Rosbank is conducting its business normally within the existing regulatory framework”, that “it has mainly local activities” and that the bank is “confident in our ability to ensure the activity for our customers”. .

In addition to the investment banking services provided by SocGen at the group level, Rosbank operates domestic insurance, car rental, leasing, factoring and receivables businesses.

Although Raiffeisen has a similar direct exposure to Russia as SocGen, the country’s importance to the Austrian bank’s overall profit is significantly higher. Its operations in Russia accounted for 19 percent of the group’s revenue and 35 percent of its pre-tax profit last year.

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Under a worst-case sanctions scenario modeled by analysts at JPMorgan, Raiffeisen would be hit hardest, with a 99 basis point fall in its Common Equity Tier 1 capital, a measure of its financial strength. SocGen would be the second most affected foreign bank, estimated at 33 basis points.

Viennese credit institutions have long played a leading role in banking in Central and Eastern Europe and act as a link between Russia and the West.

But Raiffeisen only entered the Russian market directly in 2006 with the takeover of Impexbank. The deal was part of Raiffeisen’s far-reaching expansion in Central and Eastern Europe over the past three decades.

Over the past year, it has concentrated its Russian and Ukrainian subsidiaries in the largest cities, closing branches in rural and less profitable areas.

Raiffeisen declined to comment.

Additional reporting by Gary Silverman in New York

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