Ruble rally is a headache for banks stuck in Russia

You don’t often hear bankers embarrassed about a surge in profits. But Johann Strobl, chief executive officer of Austria’s Raiffeisen International Bank, sounded almost exasperated explaining its exceptionally strong gains driven by its business in Russia.
“While we are of course pleased to report record results … we have seen an unusual, high contribution out of Russia and an unprecedented appreciation of the ruble against the euro,” Strobl said on the bank’s second-quarter earnings call. “But I will do my best to walk you through the moving parts.”
The ruble’s rally has become another complication in the efforts of banks to exit the country. Companies that chose to get out quickly after Russia’s invasion of Ukraine have taken some hefty losses. French lender Societe Generale SA confirmed a 3.3 billion-euro ($3.3 billion) pretax hit from its retreat as part of its second-quarter results.
Others acting more slowly have seen exposures grow and profits jump as the currency strengthened. The question is whether these gains might tempt banks to drag their feet on disposals or even hold onto their Russian business. In truth, this is unlikely: They might escape with smaller losses if they act fast, but with no end in sight to Russia’s aggression, they are still committed to getting out. Political and regulatory pressure isn’t going away — even if public interest has faded slightly — and financial risks could quickly worsen again.
Right now, however, banks’ Russian assets are growing faster than they are being ditched. Citigroup Inc has been cutting loans and shedding customers, getting rid of $3.1 billion of assets in local currency terms in the second quarter, it reported last month. However, currency moves still increased the size of its remaining Russian assets by $3.6 billion, leaving it with net growth of $500 million.
Raiffeisen, which has the biggest exposure to Russia relative to its size, cut loans in the country by 22% in the second quarter but saw its assets grow by 3.1 billion euros. All this is because the Russian currency rose by about 40% against both the dollar and the euro during the second quarter of the year.
Still, by cutting loans in local currency terms and by focusing on ditching the riskiest customers, banks are cutting their potential losses from an eventual exit. Citigroup said it had reduced its worst-case hit to $2 billion from $2.5 billion to $3 billion at the end of the first quarter.
The picture for UniCredit SpA of Italy is more complicated. It cut its Russian lending by 2.7 billion euros in local currency terms in the second quarter, but the rising ruble has increased the value of its equity in the Russian business to 3.5 billion euros from about 2 billion euros. At the bottom line, it still managed to reduce its worst-case Russia losses from a bad exit by about 400 million euros to 3.5 billion euros.
It also saw a big recovery in Russian profits and because other parts of UniCredit’s business performed strongly, its worst-case Russia loss is also now a much smaller proportion of its total capital.
For UniCredit and Raiffeisen, Russian profits were turbocharged not only by the currency but also by a recovery in the local business and as Russian people and companies turned to foreign-owned banks as safer alternatives to place their cash and trade currencies. All three banks insist they are continuing to hunt for ways out of the country.

—Bloomberg