European lenders have battled valiantly to maintain their eastern Europe exposures in recent years, in keeping with the so-called Vienna Initiative, as they gun for strategic growth opportunities in the medium term.
However, Ukraine is an outlier. Western European banks that increased their exposures between 2005 and 2008 have had a torrid experience in the Ukrainian market, given macro and political stresses for the best part of a decade. Erste finally pulled out of the market last year.
Domestic and Russian lenders, therefore, dominate the market, but there are notable exceptions. According to Renaissance Capital, the largest foreign bank is Raiffeisen, which is the fifth largest lender in the country in terms of assets, followed by UniCredit’s subsidiary Ukrsotsbank, the sixth largest, and Sberbank the eighth.
Given the wave of non-performing loans expected in Ukraine, a liquidity crunch in the banking system, a massive contraction of GDP, and sovereign-financing woes, the outlook for banks operating in the country is grim, while associated macro weakness in Russia, triggered by tensions with Ukraine, will have a mixed impact on domestic lenders, say analysts.
Perhaps surprisingly, Hungary’s OTP and Raiffeisen are more directly exposed to a slowdown in Ukraine than the Russian banks, with the latter having a relatively smaller percentage of assets in the country. But on the whole, international lenders’ local balance sheets in Ukraine as a percentage of their respective group earnings are relatively low across the board, suggesting negative exposures won’t trigger a material earnings risk. The exception is OTP’s Ukrainian unit, which represents 6.3% of total group assets, according to Renaissance Capital.
However, according to Fitch, Russian banks’ total exposure to the country is still large, at $28 billion, with around a half of that represented by bank financing to Russian state-owned companies that use parent units to support their Ukrainian subsidies. The agency says that the most exposed banks, as a proportion of equity, are: VEB (74%); Gazprombank (about 40%); and VTB (at least 14%). Sberbank (8%) and Alfa Bank (3%) are less vulnerable. Fitch writes: “VTB and Sberbank have direct credit exposure from their Ukrainian subsidiaries of $3.0 billion to $3.5 billion, respectively; the rest, if any, will come from parent balance sheets. The risk is mainly corporate loan exposure, hence, it is a macro/currency risk from here.”
Sberbank looks to be in a stronger position than VTB, according to RenCap analysts. They say: “VTB’s risks mainly come from its local subsidiary (assets of about $3 billion, equal to 11% of parent equity), although it has also said that at end-2013, it was directly exposed to the Ukrainian sovereign for around R20 billion ($0.7 billion). VTB’s direct exposure to local corporates from the Russian balance sheet, if any, is not disclosed publicly. Sberbank’s local subsidiary is relatively small (c. $4 billion, or 7% of equity) and there is limited direct exposure to local corporates. Sberbank has openly stated that it has no more Ukraine sovereign exposure.”
A slowdown in Russia, thanks to the Ukraine conflict, will be an earnings headwind for the large Russian lenders, thanks to the impact of a weaker rouble, FX mismatches and deposit flight. If the macro situation in Russia becomes difficult, then the impact on Raiffeisen could be big since it was expected to generate around 40% of its earnings there between 2013 and 2015.
Analysts at Credit Suisse are concerned about the outlook for VTB, in part because of its relatively weak common-tier 1 capital position, estimated at 9.2% at the end of last year, and exposure to interest-rate risk, given its greater reliance on wholesale funding. Nevertheless, the central bank’s liquidity interventions and a flight-to-safety among depositors, which traditionally benefits Sberbank and VTB, should offset these FX challenges, Credit Suisse analysts conclude.
On the whole, it’s unlikely Russian banks will be roiled by misadventures in Ukraine as, according to Morgan Stanley, the net foreign asset position of the country’s lenders have improved by over $150 billion compared with 2008.
Instead, tensions with Ukraine put the spotlight on structural flaws in Russia’s economy.