The risks are partly borne by “shadow banking” and not the banks, believes Mélanie Hoffbeck of La Française AM.
The conflict in Ukraine is not without implications for European banks which will certainly have to increase their provisions for loan losses as well as to cover their Russian or Ukrainian subsidiaries. Although it is difficult at this stage to estimate all the damage, La Française AM has tested certain establishments with more severe stress scenarios than those published by them. The results show that the banks are sufficiently capitalized. Unicredit and Raiffeisen Bank International are already considering their withdrawal from Russia. Update with Mélanie Hoffbeck, Credit Analyst at La Française AM.
More demanding simulations
The banks have just published scenarios of expropriation of their Russian, Ukrainian or Belarusian assets (and therefore loss of equity and associated assets) due to possible nationalization by the local entity. La Française AM goes further with resistance tests that it describes as more severe but also improbable. “We add a drop in income at the group level due to a potential variation in financial securities on the banks’ balance sheets. In addition, banks can estimate expected future losses on their outstanding loans and recognize a provision accordingly. In our theses, we therefore add a provision for loss on loans (10% or 25% of total loans in the three countries) due to the uncertainty of future repayment by their clients in regions affected by the current war. Finally, we compare the capital cushions of each institution after the two scenarios with the regulatory requirements of the European Central Bank”, details Mélanie Hoffbeck.
According to his most optimistic hypothesis, the only bank that presents a solvency risk is Raiffeisen Bank International.
The results show that the European banking sector is weakly exposed to Russia, Ukraine and Belarus. “We have selected the European banks most exposed to these countries via their subsidiary: 13.7% for Raiffeisen Bank International, 1.9% for UniCredit, 1.8% for Société Générale, 1.2% for Intesa Sanpaolo and 0 .6% for ING Groep”, explains Mélanie Hoffbeck.
Raiffeisen’s solvency ratio
According to his most optimistic hypothesis, the only bank that presents a solvency risk is Raiffeisen Bank International. “The Austrian bank’s hard capital ratio – known as Common Equity Tier 1 – falls below the initial regulatory requirement of 10.39%, i.e. excluding the temporary relaxation put in place in March 2020 during of the pandemic. But under its more severe scenario, Raiffeisen’s Common Equity Tier 1 ratio falls below the requirement after the easing granted by the ECB following the Covid crisis which is in place until the end of 2022, i.e. 7 .89%. The consequence of non-compliance with these requirements is the possibility of non-payment of the Additional Tier 1 CoCo debt coupons”, she continues.
Little impacted by the stress tests, the other institutions mentioned in the analysis present little risk of solvency. While the expert dismisses all systemic risk in the banking system, she is sounding the alarm about the danger posed by “shadow banking”, and in particular management companies.