Indirect effects from Ukraine war most concerning for eurozone banks – EBA

Eurozone banks face greater challenges from the spillover economic effects of the war between Russia and Ukraine than from their direct exposure to the countries, according to their top supervisor.

The potential indirect effects include a weakening economic environment hampering new lending, lower income in asset management, higher credit losses, fines over potential sanctions breaches, a lack of access to primary markets and cyberattacks, the European Banking Authority said in its latest quarterly risk dashboard published April 1. Slower lending due to the economy's weakening might also offset the benefits from higher interest rates, the regulator warned.

Direct risks to the bloc's banking system pose no fundamental threat to banking stability due to lenders' limited direct exposure to the warring nations, but the second-order effects further hurting the macroeconomy "may be more material from a financial stability perspective," the regulator said.

Large European banks are not expected to book significant increases in loan loss provisions due to the war, at least in the near term, market observers previously told S&P Global Market Intelligence.

Though many lenders reported limited and manageable exposure to Russia and Ukraine, they are yet to disclose how the unfolding crisis will affect their financial metrics and performance. Some, like Germany-based Commerzbank AG and Dutch lender Rabobank, are already in the process of winding down their Russian businesses.

Direct exposure

Banks' direct asset exposure to Russia and Ukraine is limited to a few countries and companies. Total direct exposure to counterparties in both countries amounted to €78.2 billion and €11.6 billion, respectively, while the exposure to those in Belarus totaled €2.2 billion, according to EBA data as of 2021-end.

Banks based in France, Austria and Italy have the highest volume of exposure toward Russian counterparties, it said.

Exposure to Russian and Ukrainian counterparties is mostly through units based in the two countries, the EBA noted. Some banks also have direct exposure at the head office level of other subsidiaries, usually through loans to nonfinancial corporates.

Austria-based Raiffeisen Bank International AG, one of the banks most exposed to Russia, said it is examining all options, including potentially withdrawing from the country. Italy-based UniCredit SpA is also looking at walking away from the market, and France-based BNP Paribas SA and Crédit Agricole SA have stopped doing business there.

Still, banks hold sufficient capital cushions to deal with any losses. The average fully loaded common equity Tier 1 ratio of banks in the EBA's sample was 15.4% as of 2021-end. Their average nonperforming loan ratio also declined to 2%.

The risk dashboard includes 131 banks holding more than 80% of bank assets in the European Economic Area, the EBA said.