March 21, 2014 6:06 pm

Europe’s banks count cost of US sanctions on Russia

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US sanctions against a string of Russian individuals and Bank Rossiya triggered a frantic effort by Western bank executives and compliance professionals to try to gauge the impact on their business.

Banks with exposure to Russia and Ukraine have been trawling through assets and checking client names to verify if any are on the US or European sanctions list. “We apply the regulations, but it is early days and too premature to say if we have taken any action,” said a person at one bank with operations in the region.

The crisis exercise represents yet another headache for European bank executives just as they are emerging from a bruising eurozone sovereign debt crisis and are in the middle of potentially disruptive continent-wide balance sheet health tests.

European banks’ sensitivity to Russian risk is believed to be significantly larger than that of their US and Japanese rivals. Analysts at Deutsche Bank estimate that French banks have the single highest absolute claims over Russia at $51bn.

But they say Austria faces the largest systemic risk because its banks’ $17bn in Russian claims account for 1.4 per cent of the country’s total bank assets – the highest proportion in Europe.

Austria’s high exposure is mainly due to Raiffeisen, which had more than half its pre-tax profits coming from Russia last year, according to analysts at Berenberg.

The Austrian bank said in a statement this week: “We are not concerned but of course are observing the situation very closely. After yesterday’s speech by President Putin we do not expect the conflict to escalate.”

Raiffeisen said corporate clients were repatriating their money out of fear of potential asset freezes in the west, while there had been “small outflows” as Russian retail customers increased their cash holdings and switched into US dollars. “In the corporate area we are seeing strong inflows because Russian companies are repatriating their money and investing it with us,” Raiffeisen said.

The recent unrest has already stalled the sale of Raiffeisen’s Aval subsidiary, which has 818 branches in Ukraine and assets worth €4.5bn.

France’s Société Générale is the second most exposed foreign bank to Russia and analysts estimate it could suffer a €5.2bn loss in the “worst case scenario” that it is forced to completely write off its Russian subsidiary.

While the French bank has reaffirmed its long-term commitment to Russia, investors have been pummelling the bank with questions about its exposure to the crisis in Ukraine. Its chief executive Frédéric Oudéa told a conference earlier this month that Russia had much better economic growth potential than more developed economies.

Deutsche Bank analysts said SocGen had €3.4bn of capital in Russia, as well as €500m of goodwill for the Rosbank business and about €1.3bn of internal funding from the group to the Moscow-based subsidiary. But the analysts added that they “think that the loss of SocGen Russian operations is a particularly bearish view in today’s context” and it was more likely to cause lower revenues and higher provisions at Rosbank as the overall Russian economy suffers.

But they added: “The potential loss on an immediate close down of the Russian business for SocGen could get larger if we see deposit outflows on nationalisation fears, as this would increase the intragroup funding need.”

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Kinner Lakhani, banking analyst at Citigroup, said: “Our primary concern on SocGen’s Russia exposure is exposure to an economic slowdown rather than anything more threatening.”

SocGen’s Russian unit, which has 620 branches and 5m clients, suffered a €250m goodwill writedown in 2012. But it returned to profit last year with a €165m contribution to the French bank’s bottom line.

The big five Wall Street banks convened anti-money laundering staff on Friday to cut off any links to the new list of individuals and to Bank Rossiya.

But the impact is so far expected to be very limited. “Many of the names are non-events for us as they are politicians. And Bank Rossiya is not a client for us,” said one senior London-based manager at a one of the large US banks.

Bankers are still debating how far to go in cancelling business with companies that might be linked to the sanctions list but were not directly sanctioned themselves, people familiar with internal discussions said.

One area where the impact was already felt on Friday was the credit card business, where provider MasterCard said it stopped the service of cards issued by Rossiya, Sobinbank and SMP Bank according to the US sanctions.

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