Foreign banks with operations in Russia are weighing the prospect of losing their investments in the country as international tensions build following Russia's invasion of Ukraine.

French banking group Société Générale SA, Austria's Raiffeisen Bank International AG and Hungary-based OTP Bank Nyrt., which have some of the largest exposures to Russia among nondomestic lenders, moved in recent days to assure investors and analysts that they could absorb the potential loss of their Russian units without any significant threat to their financial stability.

The U.S., EU and U.K. have imposed sweeping economic and financial sanctions on Russia in response to the invasion, prompting fears about the future of foreign banks operating in Russia. An expropriation of foreign banks' Russian assets by the Russian government is among the more extreme scenarios being considered by the lenders as they assess the implications of the crisis.

"To own a Russian bank is not a good place to be right now," said Sam Theodore, senior consultant at credit research company Scope Insights. "The worst that can happen for these banks, assuming they don't use rose-tinted glasses when they look at Russia, is they write off their investments there and walk away."

The three banks' share prices plunged by an average of 33.9% in the week following Russia's invasion of Ukraine compared to 16.3% for the Euro Stoxx Banks index.

Déjà vu

OTP has prior experience of involuntarily exiting regional markets as a result of conflict between Russia and Ukraine. Sanctions from both the EU and Russia meant the bank had to exit Crimea after Russia's annexation of the territory in 2014 and certain parts of eastern Ukraine following the outbreak of a military conflict between Russian-backed separatists and Ukrainian forces in the same year, CFO Laszlo Bencsik said during a March 4 full-year 2021 earnings call.

"We have to face the reality that the relationship between the EU and Russia can deteriorate to a level where either because of the EU or because of Russia, we are not going to be able to operate [in Russia or Ukraine]," Laszlo said. "We don't have really a choice if that happens."

Russia and Ukraine accounted for 11.6% of OTP's total group risk-weighted assets as of the end of December 2021 and more than 15% of adjusted profit for the year. A loss of both businesses would impact OTP's common equity Tier 1 ratio by 143 basis points.

A spokesperson for OTP directed enquiries to its earnings call and published material on the subject.

Extreme scenarios

SocGen has the most branches in Russia of major foreign European banks with more than 500 locations, S&P Global Market Intelligence data shows. The bank in a March 3 statement said it had sufficient capital to "absorb the consequences of a potential extreme scenario in which the group would be stripped of property rights to its banking assets in Russia."

The French lender expects that such a scenario would impact its CET1 capital ratio by 50 basis points. Its CET1 ratio stood at 13.7% as of the end of December 2021, 470 bps above the regulatory capital requirement.

SocGen's subsidiary PJSC ROSBANK is the 12th-largest lender in Russia by total assets, according to Market Intelligence data, and accounts for 83%, or €15.4 billion, of the group's total exposure to the market. Russia represents 1.7% of SocGen's total group exposure, around €18.6 billion as of the end of December last year. In 2021, Russia accounted for 2.8% of the group's revenues and 2.7% of its profits.

"In practice we expect SocGen to support its Russian subsidiary and experience higher loan losses," said Jon Peace, head of European banks research at Credit Suisse. "However, in the event of a complete write-off, SocGen has estimated that the cost would be manageable."

SocGen did not respond to a request for comment.

'Dust to settle'

Raiffeisen Bank International's shares have lost more than 53% of their value year to date. The Austrian lender would hope to recoup some of its €2.4 billion investment in its Russian unit in the event it had to sell the business, CEO Johann Strobl said on a March 1 call with investors.

"The question is, will we get anything for a very good bank?" Strobl said. "Whatever [we would receive] between €1 and €2.4 billion, the difference is the loss."

Russia constitutes 9.9% of Raiffeisen's total group exposure, or €22.9 billion as of the end of December 2021. The country provided more than one-third of the group's pretax profit in 2021.

Strobl said Raiffeisen has no plans to exit the Russian market, where it is the 10th-largest lender by total assets, despite press reports that such a move was under consideration. Still, Raiffeisen would have to wait for the "dust to settle" before it makes any decisions on its future in the market, said Strobl.

"The dust is still there," Strobl said. "One does not know where the sanctions will lead to and what it would mean in the mid- to long-term for a bank like ours."

Ruptures to Ukraine's banking system would hit Raiffeisen particularly hard: more than 20% of the group's branches are located in the country.

A spokesperson for Raiffeisen said the bank had no further comment to make beyond what was disclosed March 1.

High risk

Russia has been a highly profitable market for foreign banks in recent years. Raiffeisen's Russian unit enjoyed a return on equity after tax of 27.2% in 2021, significantly above the 10.6% recorded at group level, while OTP's ROE for Russia in 2021 more than doubled year over year to 18.2%.

"These European banks were eager to get the high margins in Russia and they stayed there," said Theodore. "But the reverse of high margins is high risk."

With sanctions increasing by the day, a Venezuela-like nationalization of assets cannot be ruled out, according to Sobiesław Kozłowski, head of the analysis department at Polish broker Noble Securities. "The probability is not zero and has recently increased significantly," Kozłowski said. "The question is not if, but when the provisions will be reflected and how big they will be."

Even if the banks avoid losing their businesses as a retaliatory sanction from the Russian government, a significant deterioration in the Russian economy would affect loan quality and could force foreign lenders to reconsider their position in the market, said Jerzy Kosiński, an analyst at Bank Pekao's brokerage unit.

"We cannot rule out that some banks may want to redefine their strategy," said Kosiński. "Potential changes in the strategy are difficult to predict and may also include limiting the scale of operations in this market or even exiting it."