Europe’s top financial supervisor said it was putting pressure on eurozone banks to cut their Russian exposures even as the window to sell these assets was narrowing after the Kremlin turned “more hostile” to such moves.
Andrea Enria, chair of supervision at the European Central Bank, said “many banks have taken action” to reduce their exposure to Russia since its troops invaded Ukraine almost a year ago, but he added that it would welcome “any opportunity for banks to exit”.
Many of the 45 western banks with subsidiaries in Russia have sought to leave the country, but only a handful have done so, often at a steep cost. The two left with the largest exposures are both under ECB supervision: Austria’s Raiffeisen Bank International and Italy’s UniCredit.
“Of course we are putting pressure on banks to actively manage the risks [of their Russian exposures],” Enria told a press conference in Frankfurt on Wednesday. “Any opportunity for banks to exit from this business would be something that we would view attractively from a supervisory point of view.”
Western banks’ plans to make a swift exit from Russia were dealt a blow last year when President Vladimir Putin said foreign owners from “unfriendly” countries could not complete deals without his approval. “The window to sell has been closing a bit,” said Enria.
France’s Société Générale is one of the few western banks to complete a sale of its Russian subsidiary. But it took a €3.1bn hit on the deal it agreed with Russian billionaire Vladimir Potanin, a close ally of the Kremlin. Both Raiffeisen and UniCredit have said they are looking at ways to exit Russia.
Enria said several eurozone banks had already reduced their cross-border business with Russia, taken provisions for potential losses on this exposure, or separated their Russian operations from the rest of the group.
Another concern for the ECB is the economic fallout from Russia’s invasion of Ukraine, which sent the price of energy and other commodities soaring and triggered an unprecedented rise in interest rates by the central bank.
Enria told reporters that while banks’ profits and capital levels had been boosted by higher interest rates, the ECB was concerned about signs that higher borrowing costs and slowing growth could lead to a fresh build-up of bad debts.
“For specific portfolios and business lines, the costs associated with a deterioration in asset quality may outweigh the income benefits as interest rates keep increasing,” he said, adding that there had already been a rise in underperforming loans, known as “stage 2” loans.
SocGen said on Wednesday that it had set aside €413mn for bad loans, a fivefold increase, which led to a 35 per cent drop in fourth-quarter profits.
The ECB is also worried that some banks are not taking sufficient provisions to account for potential losses on their existing non-performing loans. Enria said it raised the capital requirements for 24 such banks last year.
Enria added that “persistent concerns about banks’ governance and internal risk controls” had become more pressing due to the energy crisis and economic downturn facing Europe.
He said that in a “limited number of cases, banks have reduced distribution amounts” by scaling back dividend or share buy-back plans after discussions with their supervisors. The Financial Times reported last year there was tension between the ECB and UniCredit over its plans to return €16bn of cash to shareholders by 2024 and its failure to leave Russia.
Overall, eurozone banks had “solid capital and liquidity positions” with their average common equity tier one ratio — a key benchmark of balance sheet strength — slipping only slightly last year to just below 15 per cent, Enria said.
Only one eurozone bank had fallen below the minimum capital levels stipulated by the ECB’s guidance as of September 2022 — down from six in 2021. But this lender — understood to be Italy’s Monte dei Paschi — has since climbed above the minimum threshold thanks to a €2.5bn capital increase, including €1.6bn from the Italian state.
Source: Financial Times