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Ukraine/EU banks: when aftershocks are worse than the earthquake

EU banks may have to close their businesses in Russia and Ukraine following the larger country’s invasion of its smaller neighbor. On Wednesday, UniCredit from Italy marked the maximum Potential losses of 7 billion euros From Russia’s operations. French BNP Paribas said it has exposures of 3 billion euros.

But the European banking sector has not fallen by 15% in response to modest risks like these. Instead, the fall anticipates fears of a European recession and new restrictions, political motives, in payments to investors.

Food and fuel prices are soaring. Growth is expected to disappoint. The European Central Bank, which is preparing to raise interest rates towards the end of the current year, appears to be holding fire. Slim net interest rate spreads should remain that way.

A group of EU banks, including UniCredit, BNP and Italian Intsa, have imposed dividend and repurchase rates in excess of 100% of profits this year. Regulators, fearful of a political blow, can be expected to demand more restraint.

UniCredit has confirmed that it will pay dividends due last year. But that raised a question mark over plans to start returning 16 billion euros this year. The Ukraine war has already prevented UniCredit’s attempt to buy Otkritie, a Russian bank now subject to Western sanctions. Taking over a rumor about the smaller local lender Banco BPM is now unlikely.

The bad luck plaguing CEO Andrea Orsel could be exacerbated. UniCredit may have to wipe out all its Russian business, which includes 14 billion euros of total loan exposure and 2 billion euros of equity. The cost will be 2 percentage points of Tier 1 or About 7 billion euros.

Tier 1 of ordinary capital dropped to 13%. Any lower and offered purchase of 2.6 billion euros this year will be stopped automatically.

UniCredit’s estimated losses as a result of a total write-off will outweigh the losses in Société Générale, which has € 19 billion in total exposures from Russia – related counterparties. The French bank thinks a similar extreme scenario will cost it only 0.5% of CET1, or about 2 billion euros.

Banks in Europe remained well capitalized. They have a large inventory of unused supplies built up during the plague. Potential capital returns for this year stand at € 90 billion, split roughly in the middle between cash and repurchases.

The plague forced the banks to stockpile their large amount. Prolonged conflict in Ukraine may leave them uncomfortable on excess capital no less time.

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