How banks can get hit by Putin’s war

Bank stocks have tumbled more than most since Russia’s unprovoked invasion of Ukraine — and not just in Europe. Shares in big US banks have also fallen about twice as much as the S&P 500 in percentage terms in the past month.
Investors aren’t just worried about loans into Russia and Ukraine: Direct exposures look manageable for even the handful of European lenders that have the biggest businesses
inside President Vladimir Putin’s increasingly isolated country.
The bigger concern is the global economic disruption caused by Putin’s aggression and the Western allies’ response. There is a growing realisation that interest rates in Europe and the US aren’t likely to rise as far or as fast as most thought just a couple of weeks ago.
Also, a collapse in investment-banking revenue in highly volatile markets could cause an even bigger hit to revenue.
To look at the potential for direct losses first, they appear bad but not disastrous. Among US lenders, Citigroup Inc looks to be one of the most exposed, with $9.8 billion in total loans. If all that was worthless, the loss would
eat about 6.5% of Citi’s equity capital, painful but nowhere near existential.
In Europe, the bank with the most at risk relative to its size is Austria’s Raiffeissen Bank International. Its total 22.85 billion euros ($25 billion) in Russian assets and other exposures is double its equity base. But’s that’s a misleading number.
The vast majority of RBI’s risks are in a Russian subsidiary from which it could walk away if the worst came to the worst. Quitting Russia would cost RBI the equity in its Russian bank, worth just 2.4 billion euros. That’s 20% of RBI’s total equity and would be painful. But RBI would still have a sturdy enough balance sheet without having to raise fresh equity: Amputating the Russian bank would leave it with a much smaller balance sheet and so it would require less capital.
It’s a similar story for UniCredit SpA and Societe Generale SA, the other Europeans with large direct exposures — in the mid-teen-billions of euros. Losing the equity in their Russian arms would hurt profits but barely trouble their balance sheets.
Deutsche Bank AG, meanwhile, has only 600 million euros of net loans into Russia, rising to 1.4 billion euros excluding guarantees and collateral. And yet Deutsche Bank stock is down a third over the past month, not far behind UniCredit and SocGen, which are both down about 40%.
It’s the indirect hit that investors are most worried about. Banks in the US and Europe had rallied in recent months on expectations that interest rates would rise in both markets, boosting income. That is now much less certain. Loans to European companies that do business linked to Russia might also go bad and lead to losses.

—Bloomberg