Ruble rally is a headache for banks stuck in Russia

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You don’t often hear bankers embarrassed by increased profits. But Johann Strobl, chief executive of Austrian bank Raiffeisen International, sounded almost exasperated as he explained his unusually strong earnings from his Russian business.

“While we are of course delighted to report record results…we saw an unusual and high contribution from Russia and an unprecedented appreciation of the ruble against the euro,” Strobl said on the call for the bank’s second-quarter results this week. “But I’ll do my best to guide you through the moving parts.”

The ruble’s rally has become another complication in banks’ efforts to exit the country. Companies that chose to pull out quickly after Russia invaded Ukraine suffered heavy losses. French lender Societe Generale SA on Wednesday confirmed a 3.3 billion euro ($3.3 billion) pretax hit following its retirement as part of its second-quarter results.

Others, acting more slowly, saw their exposures increase and their earnings jump as the currency strengthened. The question is whether these gains could cause banks to drag their feet on divestitures or even keep their Russian businesses. In truth, it’s unlikely: they might get away with less casualties if they act quickly, but with no end in sight to Russia’s aggression, they’re still determined to get out. Political and regulatory pressure is not waning, even though public interest has waned slightly, and financial risks could quickly escalate again.

Currently, however, Russian bank assets are growing faster than they are being shed. Citigroup Inc. cut loans and lost customers, shedding $3.1 billion in local currency assets in the second quarter, it reported last month. However, currency movements further increased the size of its remaining Russian assets by $3.6 billion, leaving it with a net growth of $500 million.

Raiffeisen, which has the largest exposure to Russia relative to its size, cut its loans in the country by 22% in the second quarter but saw its assets increase by 3.1 billion euros. All this is due to the fact that the Russian currency appreciated by about 40% against the dollar and the euro during the second quarter of the year.

Yet by reducing local currency lending and focusing on dropping riskier customers, banks are reducing their potential losses from an eventual exit. Citigroup said it cut its worst-case scenario to $2 billion from $2.5 billion to $3 billion at the end of the first quarter.

The picture for UniCredit SpA of Italy is more complicated. It cut its Russian loans by 2.7 billion euros in local currency in the second quarter, but the rise in the ruble increased the value of its stake in the Russian company to 3.5 billion euros from around 2 billion euros. In the end, he still managed to cut his worst losses in Russia from a poor outing from around €400m to €3.5bn.

It has also seen a strong recovery in Russian profits and, as other segments of UniCredit’s business have performed well, its worst loss in Russia now represents a much smaller proportion of its total capital. “We believe 2Q’s turnaround underpins UniCredit’s plan not to sell its Russian subsidiary at any cost, contrary to Societe Generale’s decision,” Bloomberg Intelligence analyst Tomasz Noetzel wrote.

For UniCredit and Raiffeisen, Russian earnings have been boosted not only by the currency, but also by a recovery in local business and by the fact that Russian citizens and businesses have turned to foreign banks as safer alternatives to place their cash and exchange currencies.

All three banks insist they continue to look for ways to get out of the country. But not only is it difficult to find an acceptable buyer, but government sanctions and interests inside and outside Russia are also significant and unpredictable obstacles.

Banks, however, need to find solutions to their exposures to Russia, despite the apparent local recovery and earnings gains. The country’s economy is weakening and heading into a severe recession in 2023, which would make remaining exposures more risky – this matters less to Raiffeisen as its Russian subsidiary is capitalized separately and therefore mostly isolated from the rest of the bank.

On top of that, the ruble’s rally isn’t particularly reliable either: sanctions mean trading in the currency is weak. Even if the war on Ukraine ends and relations begin to normalize between Europe, the United States and Russia – which seems very optimistic – a reopening of finance and trade could well see the currency collapse once again. A good quarter should not cause any bank to rethink risky Russia.

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This column does not necessarily reflect the opinion of the Editorial Board or of Bloomberg LP and its owners.

Paul J. Davies is a Bloomberg Opinion columnist covering banking and finance. Previously, he was a reporter for the Wall Street Journal and the Financial Times.

More stories like this are available at bloomberg.com/opinion

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