Why the war in Ukraine is clouding the outlook for banks

Five weeks after the start of the war in Ukraine, banks are beginning to revise their outlook. On Monday, Germany’s second-largest bank Commerzbank warned that the conflict and accompanying geopolitical risks could impact its business and earnings.

“There are numerous risk factors that could affect the 2022 earnings forecast to a significant, although not reliably quantifiable, extent should events take an adverse turn,” the group wrote in its annual report. These are above all exceptionally high global economic risks”.

Commerzbank’s analysis makes sense: the Russian-Ukrainian conflict is straining the global economy, with rising commodity prices and economic sanctions hampering business activity. But the German bank, which had already announced to reduce its exposure to the Russian market, is one of the first to recognize that there will indeed be an impact on its financial performance.

Financial provisions

A month after the start of the Russian invasion in Ukraine, and as the first quarter draws to a close, a first assessment can already be drawn up: 2022 will not look like what was forecast in the financial presentations of the banks at the start of ‘year. And it’s a safe bet that many of them will adjust their estimates in the coming weeks, when the quarterly results are published.

Financial analysts have already started this work. In a Monday note, Citi experts forecast a downward revision to 2022 earnings estimates for European banks.

“In the short term, there is a risk of a slowdown in credit demand, a drop in asset management commissions and a rise in the cost of risk”, they justify. The banks, which would have been tempted by reversals of financial provisions after the Covid crisis, could review their plans and be more cautious.

The same logic has led UBS analysts to lower their forecasts for Crédit Agricole with lower growth in international retail banking, lower than expected market revenues, and higher provisions for 2022. and 2023. In total, UBS has cut its earnings per share estimates for the French bank by 7% this year.

Rising costs

“All the banks will review their copy. We are all the same witnessing a profound revision of the macroeconomic outlook”, considers Jérôme Legras, director of research at Axiom, who expects to see the impact of the war on the cost of risk and on the income prospects of institutions. .

The inflationary context, further reinforced by the Ukrainian crisis, could also have an impact on costs, which were already trending upwards in most of the large banking groups at the end of last year against a backdrop of rising personnel costs.

To this could also be added the costs linked to the management of the sanctions against Russia, which push the banks to adapt their organization in terms of risk control and compliance.

Rate spreads

In the longer term, the macroeconomic disturbances linked to the current tensions will have implications for the monetary policies applied in the various economic zones. The rate hikes hoped for in Europe by the banks after a decade of low rates could thus be expected despite the rise in inflation.

“With the war in Ukraine, monetary policies in Europe and the United States may diverge more than had been anticipated. This can have a significant impact on the economic scenarios of banks in the medium and long term”, warns Thierry Mennesson, partner at Oliver Wyman.

It remains to be seen whether the situation could ultimately lead the banks to review their multi-year strategic plans. “We are not there yet, assures a good connoisseur of the sector. The environment is certainly more unpredictable, but the major trends remain relevant”. BNP Paribas confirmed on March 9 its objectives announced a month earlier, but postponed its investor day which was scheduled for March 14.

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