16 March 2022

SSM: Invasion of Ukraine: euro area banks so far resilient to a second exogenous shock

The invasion of Ukraine reversed a steady improvement in investors’ stance on EU banks

Prior to the geo-political shock, investors were positive on
banks:
• upside linked to reversal of provisions and gradual normalisation of
interest rate environment
• aggregate banks’ profit projections above pre-COVID levels until 2023
• some lenders projecting medium-term double-digit return on equity, to
levels at or above cost of equity.

Since escalation of the conflict, markets have been pricing in
uncertainty over sanctions, extent of exposure, and macro
implications:
• Direct exposures to Russian counterparts, including:
• Towards sanctioned entities
• Cross-border loans
• Euro area-owned subsidiaries in Russia
• Direct Russian links in euro area: Russian subsidiaries
• Indirect exposures and financial markets volatility (commodities)
• Russian-sovereign default scenario?
• Operational risk: cyberattacks, IT connections to Russia/Ukraine
• Macro impact: revised GDP growth and price inflation

Direct exposures to Russia are manageable overall

Exposures of euro area banks to credit, securities and
derivatives appear contained
• Russian economic downturn likely to cause asset quality
deterioration and credit valuation adjustments.
• Institutions are reducing exposures and unwinding positions.
Operational hiccups due to sanctions (e.g. asset freezes, exclusion
from SWIFT) contained so far.
Source: COREP, Q3 2021 data.

Interest rate derivative
Even extreme “walk-away” scenarios from subsidiaries in
Russia owned by significant institutions seem manageable given
the currently solid group capital position
• In light of sanctions and Russian retaliation, market intelligence is
not ruling out the possibility of “walk-away” scenarios.
• Limited intra-group funding at risk, as most establishments are
locally funded;
• Equity in subsidiaries would be at stake.
Impact from Russian links so far contained
• Sanctions and potential Russian retaliation can put pressure on EU
establishments of Russian groups (e.g. Sberbank AG) or raise
counterparty/correspondent banking concerns..

full presentation at  SSM

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