Banks betting on Russia face new test of appetite

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Western banks are used to political turbulence in Russia. Societe Generale, which first set up shop in the country 150 years ago, was forced into a 56-year hiatus after the Bolshevik Revolution of 1917.

Since its return, the French lender has weathered the end of communism, Russia’s sovereign default in 1998 and the annexation of the Crimean peninsula in 2014.

Today, as Russian troops massed on the Ukrainian border, SocGen was one of the banks put on notice earlier this month by the European Central Bank. The Financial Times revealed this week that the ECB had warned lenders exposed to Russia to prepare for the imposition of international sanctions against the country in the event of an invasion of Ukraine.

Along with SocGen, Raiffeisen Bank in Austria and UniCredit in Italy are among the European banks with the largest operations. The trio together represent 3.7% of the assets of the Russian banking system, according to data compiled by JPMorgan.

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

As a result, the Kremlin pursued a “fortress Russia” strategy to make it less dependent on foreign funding. Business loans from foreign lenders fell from $150 billion in March 2014 to $80 billion last year, according to Russia’s central bank.

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

For the remaining lenders, including the Hungarian OTP Bank, the Russian market still has its attractions. Spreads on retail banking are attractive, while lucrative trading, funding and advisory fees can be seen, especially in the country’s energy and natural resources sector.

Indeed, UniCredit chief executive Andrea Orcel said on Friday that the Italian lender had considered an acquisition of the Russian lender owned by the Otkritie government before political tensions escalated over Ukraine.

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

Among the information requested by the ECB was how banks analyzed their exposure to Russia and what contingency plans they prepared in the event of sanctions.

Several European banks operating in Russia said they had engaged in preparations ahead of the ECB’s warning.

“We don’t need regulators asking us how we manage risk for us to act,” the chief executive of a European bank told the FT.

“If you follow the news, you will look clearly at your exposures. Whenever there are geopolitical tensions and economic uncertainties, you constantly review your portfolio.

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An executive at a European bank with a large Russian subsidiary said it has stepped up preparations over the past three weeks, dramatically boosting its liquidity levels in anticipation of anxious customers withdrawing cash. It had also tripled currency hedging on its exposure to Russia, they said.

After being hit hard in 2014 when Russia was sanctioned over Crimea, the bank inserted clauses into all its loan agreements in the country so that any customers hit by sanctions could no longer obtain additional credit and had to repay. existing loans, the executive said. The bank had also made provisions for potential losses from sanctions and could withhold other reserves.

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

One US bank that has persevered with Russia is Citigroup, which had $5.5 billion in loans, securities and other assets linked to Russia at the end of the third quarter of 2021, according to the latest filing. 10-Q from the bank with the Securities and Exchange Commission. This represented 0.3% of its total assets.

Last April, Jane Fraser, chief executive of Citigroup, said the bank was putting its retail business in Russia up for sale, 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 euro exposure to the country is now mainly through its subsidiary Rosbank. He bought 20% of Rosbank in 2006, taking majority control two years later during the financial crisis.

The company accounts for 3% of SocGen Group’s revenue and 4% of its pre-tax profit, according to JPMorgan estimates.

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

SocGen downplayed the risk of its exposure to Russia, saying that “Rosbank is operating in normal mode within the existing supervisory framework”, that “it mainly has local activities” and that the bank is “confident in our ability to ensure the activity for our customers”.

In addition to investment banking services provided at the SocGen group level, Rosbank operates domestic insurance, car rental, leasing, factoring and accounts receivable branches.

Although Raiffeisen has direct exposure to Russia similar to SocGen, the country’s importance to the Austrian bank’s overall earnings is significantly higher. Its Russian operations accounted for 19% of revenue and 35% of the group’s pre-tax profits last year.

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Under the worst-case sanctions scenario modeled by JPMorgan analysts, Raiffeisen would be hit the hardest with a 99 basis point drop in its Tier 1 common equity, a measure of its financial strength. SocGen would be the second worst-hit foreign bank at 33 basis points, according to the estimate.

Vienna lenders have long played a prominent role in banking in Central and Eastern Europe, acting as an intermediary between Russia and the West.

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

Over the past year, it has concentrated its Russian and Ukrainian subsidiaries in the biggest 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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