Big European banks are not expected to book significant levels of provisions in the near term due to the Russia-Ukraine conflict, after seeing year-over-year declines or reversals in the final quarter of 2021.
Banks moved to allay investor concerns about their exposures to the two countries after the international community imposed sanctions on Russia following the start of its invasion of Ukraine in late February; many of them said their exposures are limited or relatively low since they have made cuts in recent years.
As such, provisions are not expected in the first quarter, Philipp Wackerbeck, global head of financial services at PwC unit Strategy&, told S&P Global Market Intelligence in response to emailed questions.
Among European banks with the highest exposures to Russia are Austria-based Raiffeisen Bank International AG, France's Société Générale SA and Italy-based UniCredit SpA.
While noting the war has already led to a material deterioration in the quality of banking assets in Russia and Ukraine for which banks will have to provision, Marco Troiano, Scope Ratings' head of financial institutions, told Market Intelligence final losses will still depend on how the conflict evolves and on the impact of sanctions on the Russian economy.
Q4'21 normalization
Many banks continued to report lower loan loss provisions on a yearly basis in the final quarter of 2021, reflecting normalization versus the highs at the start of the COVID-19 pandemic in 2020.
Of the 25 large European banks tracked by Market Intelligence, 15 booked declines in loan loss provisions, seven reported reversals and only two saw an increase. Of the seven that reported reversals, three were from the U.K. — Lloyds Banking Group PLC, NatWest Group PLC and Barclays PLC. Swiss banks UBS Group AG and Credit Suisse Group AG also made writebacks, as did Denmark-based Danske Bank A/S.
The declines and reversals were supported by economic recovery from the COVID-19 pandemic across the continent.
"[As] conditions improved and actual arrears remained low, these model-driven provisions declined," Christian Scarafia, head of northern Europe bank ratings at Fitch Ratings, said in an email interview.
British banks were among the most proactive in the continent to make provisions at the height of the pandemic, and now, as movement restrictions in the country end, banks are looking to put COVID-19 behind them, S&P Global Ratings analysts said in a March 3 report. Provision writebacks were the key drivers of U.K. banks' "exceptional performance" in 2021, according to the agency.
But still, a few banks continue to hold management overlays above model-driven provisions, Fitch's Scarafia said. Spanish banks Banco Santander SA and Banco Bilbao Vizcaya Argentaria SA were among those with the highest provisions, setting aside €1.42 billion and €820 million, respectively, in the quarter. Italy-based Intesa Sanpaolo SpA and UniCredit along with France-based Crédit Agricole Group, Groupe BPCE and BNP Paribas SA also booked provisions above €500 million.
Meanwhile, larger French banks' asset quality has not yet exhibited signs of deterioration, although nonperforming loans are expected to materialize in the coming quarters, according to DBRS Morningstar. Thanks to solid capital buffers, the banks are "well-equipped" to cope with any pandemic-related flare-ups, the agency said in a Feb. 16 commentary.
Banks in Russia and Ukraine, where government ownership means banks are subject to different market dynamics than those in Western Europe, were excluded from this analysis.
Income increase
Some banks that continue to hold provisions, however significant, are also those that generated the highest net income in the fourth quarter of 2021. Three of the top five banks with the highest net income in the quarter are from France, with Credit Agricole, BNP Paribas and SocGen generating €2.35 billion, €2.31 billion and €1.79 billion, respectively.
Banco Santander's net income also breached €2 billion, despite holding on to provisions. U.K.-based HSBC Holdings PLC and Barclays reported net income above €1.5 billion.
At the bottom of the pile was Credit Suisse, which reported a €1.90 billion net loss, partly owing to impairments at its investment bank, which it is scaling back amid a groupwide strategy refocusing. Credit Suisse grappled with a string of costly scandals in 2021, including those related to the collapse of U.S. hedge fund Archegos Capital and British specialty lender Greensill Capital (UK) Ltd.
Potential long-term impact from war
The Russia-Ukraine crisis and international sanctions on Russia could result in second- and third-round effects in future, Strategy&'s Wackerbeck said. One example is companies being unable to make loan repayments. Once exposed companies suffer from such effects, higher provisions may occur and could extend even to banks without any direct exposure to Russia or Ukraine, Wackerbeck said.
The uncertainties right now focus on the potential deterioration of the macroeconomic outlook for Western Europe, as the war could lead to disruption of trade links, high energy prices and lower confidence, Scope's Troiano said.
The economy and consumers are now cautious amid a spike in the price of raw materials and energy, said Wackerbeck. The demand for loans has already declined and could further crash if prices continue to rise, exacerbated by increasing inflationary pressure, he added.
Some banks, including SocGen and UniCredit, said they have sufficient capital buffers to cushion any potential impact from the conflict. At 2021-end, all banks in Market Intelligence's sample had double-digit common equity Tier 1 ratios, a key measure of their financial strength.
UniCredit, the planned €2.50 billion share buyback of which depends on its CET1 ratio not falling below 13%, had a ratio of 15.81% at the end of 2021, while SocGen had a ratio of 13.70%. Santander had the lowest ratio of 12.51%.