The three EU banks with the largest exposure to Russia increased their year-over-year first-quarter net profits in the country, even as regulatory pressure mounted on lenders to curb their local businesses.

Austria-based Raiffeisen Bank International AG (RBI), Italy's UniCredit SpA and Hungary's OTP Bank Nyrt. jointly earned roughly €613 million in Russia in the first quarter, almost flat quarter over quarter but up 38% from the year-ago €445.6 million, S&P Global Market Intelligence calculations show.

RBI, with the highest exposure to Russia among EU banks, increased its first-quarter net profit 2.8% quarter over quarter and 8.2% year over year to €326 million. Profit from Russian operations accounted for close to 50% of the group's after-tax profit for the quarter, the highest ratio among the three banks.

The Russian net profit of UniCredit dropped quarter over quarter but more than doubled year over year to €213 million, supported by higher trading income, lower provisions and lower operating costs.

OTP Bank saw its after-tax profit in Russia grow 27% quarter over quarter and 64% year over year to 29.4 billion forints, the highest increase among the three banks. It benefited from strong growth in net interest income, coming from deposits placed with the Russian central bank amid high interest rates, as well as a year-over-year increase in net fee and commission income.

The trio's aggregate profits in Russia exceeded €2.2 billion for 2023 versus the €2 billion earned in 2022 and €750 million in the pre-war 2021. OTP Bank obtained 13.5 billion rubles in pretax dividends from the local unit, and additional dividend payouts are planned in 2024. UniCredit's Russian unit contributed €137 million in dividends paid out to investors in 2023, Reuters reported July 2. RBI's Russian profits remain locked in the country.

Regulatory scrutiny

Amid a Western push to curb Russia's war efforts in Ukraine, the activities of EU banks in Russia — particularly those with significant exposure — have come under close regulatory scrutiny.

"We believe the intensity of regulatory interactions and communications between the European Central Bank and banks operating in Russia will increase considering the public interest mainly in Europe and the US," Cihan Duran, associate director, Financial Services, at S&P Global Ratings, told Market Intelligence.

The ECB asked RBI in April to reduce its customer loans in Russia by 65% by 2026, compared with the third quarter of 2023, and to curb international payments originating from Russia. These demands go far beyond RBI's own plans and could complicate its ability to sell the Russian unit, according to an RBI spokesperson.

"RBI continues to work towards the deconsolidation of its Russian subsidiary," the spokesperson told Market Intelligence.

The Austrian lender has already cut its Russia customer loan portfolio by 58% since the second quarter of 2022, with the portfolio accounting for roughly 5.8% of the group's total portfolio as of March-end. With new lending discontinued, RBI's portfolio in Russia will continue to decline, which will reduce Russia-based risk-weighted assets, Christian van Beek, an analyst in the financial institutions team of Scope Ratings, told Market Intelligence.

The divestiture process is a very complex and challenging task for RBI, according to Scope Ratings' van Beek. "Demerger is also an option and one that RBI has publicly mentioned but it is difficult from the outside to gain a real understanding of the vigor with which it is pursuing these options," van Beek said.

RBI was forced to drop a deal designed to release some profits trapped in Russia in May after pressure from US regulators. The deal would have involved Austrian company Strabag, which was linked to sanctioned Russian investor Oleg Deripaska.

The ECB also asked other eurozone banks with significant exposure to Russia to downsize and exit the country more quickly, while the Hungarian central bank recommended that OTP Bank reduce deposits and corporate loans in Russia and maintain its current level of retail loans there.

Russian loans to customers account for 0.7% of UniCredit's customer loans and 3.3% of OTP Bank's customer loans, according to Market Intelligence data.

UniCredit said in July it was seeking legal clarification from the EU's General Court over the ECB request and asked for the suspension of the request during the proceedings. UniCredit executives said in May that its exposure to Russia fell 67% in the last two years, and that it will continue with this reduction push. CEO Andrea Orcel has said the group is interested in selling the Russia business.

UniCredit did not respond to Market Intelligence's request for comments.

OTP is in dialogue with the Hungarian central bank regarding actions to meet its recommendations, although they are not binding, a bank spokesperson told Market Intelligence. The bank's retail loans in Russia grew 6% quarter over quarter, but corporate loans declined 11% in the same period and have shrunk 85% since the outbreak of the war, according to the spokesperson.

"Since February 2022 we stopped underwriting new corporate loans, [and] through gradual amortization they will disappear," the spokesperson said. OTP Bank is considering all options regarding the Russian business and complies with all sanctions and regulatory requirements of all relevant authorities, the spokesperson said.

Risks remain

While all three banks remain present in Russia, staying in the country for longer will require intensive risk management to prevent potential sanction breaches or involvement in money laundering, Ratings' Duran said.

"Clearly nonfinancial risks related to potential sanction breaches, regulatory interventions and general reputational risks remain," the analyst said.

Financial risks related to Russia exposure are manageable for banks with significant exposure, but exposed banks remain "highly vulnerable" to sanctions risk and potential fines, according to Morningstar DBRS.

– Access details of the latest sanctions imposed on Russia. – Access financial highlights for OTP Bank, Raiffeisen Bank International and UniCredit. – Access Q1 2024 earnings transcripts for OTP Bank, Raiffeisen Bank International and UniCredit.

Société Générale SA sold its subsidiary in 2022, while UK-based HSBC Holdings PLC also recently finalized the sale of its Russian unit. Italy-based Intesa Sanpaolo SpA secured the approval of President Vladimir Putin last year to sell its Russian subsidiary, but the transaction has not yet been completed. Intesa did not respond to Market Intelligence's request for comments as to when it expected to complete the deal.

Other EU banks that are still present in Russia include ING Groep NV and Commerzbank AG, but their exposure is relatively small.

Commerzbank has discontinued new business and restricted its business activities connected to Russia in line with existing sanctions, a spokesperson told Market Intelligence.

"We have reduced our exposure by more than 90% to €171 million at the end of March" the spokesperson said. ING did not respond to a request for comment.

As of July 9, US$1 was equivalent to 87.83 Russian rubles and 365.13 Hungarian forints.