No soft landings in flight to safety from Russia
Impact of Ukraine invasion hit bank balance sheets hard; its effects look set to continue
Global banks’ flight to safety from Russia-related exposures is at full throttle. As economic sanctions continue to hit, divesting soured assets and implementing defences to preserve capital are a priority for exposed dealers.
The Q1 earnings season gave a glimpse into top lenders’ actions against rising market, credit and counterparty risk stemming from Russia.
It also showed more work is needed and that the impact on bank portfolios and balance sheets has not been uniform – partly due to differing exposures before the Ukraine invasion – but the diverse actions taken since February 24 have also played a significant role.
The sanctions have prompted wild moves in banks’ risk gauges. UBS, for example, saw the capital charge for settlement risk spike 238% – even higher than during the worst of the 2020 Covid-19 outbreak.
Its chief executive officer claims the sanctions not only led to an increase in counterparty risk, but also prevented it from collecting money from solvent counterparties. Whether this was an intended consequence of the sanctions isn’t clear.
What is clear is that the war could drag on for much longer and continue to hurt the bank’s coffers.
At other lenders, soured Russia exposures and related provisioning costs skyrocketed. By end-March, ING Bank and UniCredit, two of the most exposed lenders before the invasion, reported an aggregate $2.1 billion in loan-loss provisions against Russia-related exposures.
Both banks’ core capital ratios fell as a result, and UniCredit tied future payout plans to the successful unwinding of its Russian investments.
One bank that didn’t wait for quarterly results before cancelling planned dividends was Austria’s Raiffeisen Bank International. In Q1, the bank’s value-at-risk – its measure of banking and trading book sensitivity to market swings – exploded. One- and 20-day VAR jumped 317% and 154% respectively to multi-year highs.
Although less exposed to Russia than its European peers, JP Morgan also took its knocks when sanctions – and wild swings in nickel prices – hit. The US dealer took a $524 million loss from derivatives valuation adjustments – the largest since the pandemic first hit.
So, the picture is clear: banks exposed to Russia have taken a serious beating. Additional provisioning or a prolonged halt to payout or buy-back plans may yet deal further blows.
So long as sanctions remain in place and Russian counterparty creditworthiness continues to deteriorate, closing out positions and writing off exposures might be the only reasonable strategy.
The impact will take some time to absorb.
Only users who have a paid subscription or are part of a corporate subscription are able to print or copy content.
To access these options, along with all other subscription benefits, please contact info@risk.net or view our subscription options here: http://subscriptions.risk.net/subscribe
You are currently unable to print this content. Please contact info@risk.net to find out more.
You are currently unable to copy this content. Please contact info@risk.net to find out more.
Copyright Infopro Digital Limited. All rights reserved.
You may share this content using our article tools. Printing this content is for the sole use of the Authorised User (named subscriber), as outlined in our terms and conditions - https://www.infopro-insight.com/terms-conditions/insight-subscriptions/
If you would like to purchase additional rights please email info@risk.net
Copyright Infopro Digital Limited. All rights reserved.
You may share this content using our article tools. Copying this content is for the sole use of the Authorised User (named subscriber), as outlined in our terms and conditions - https://www.infopro-insight.com/terms-conditions/insight-subscriptions/
If you would like to purchase additional rights please email info@risk.net
More on Our take
Hedge funds must race the clock to check their dealer-rule status
Working out whether a firm is caught by SEC registration requirement could take months
Filling gaps in market data with optimal transport
Julius Baer quant proposes novel way to generate accurate prices for illiquid maturities
Why Europe still awaits a private credit CLO
Tricky questions face managers that plan to launch the structure on the continent
The signs of tacit collusion in the dividend play trade
Game theory and real-world data point to a different understanding of how arbitrage in markets works
Decades of history says you can beat high inflation with quality
Factors such as momentum and value generally outperform the market irrespective of inflation, but new research suggests quality stocks are best when prices are rising rapidly
Esma faces tough task in implementing Emir 3.0
EU regulator must contend with tight timeframes and increasing workload without additional resources
Quants are using language models to map what causes what
GPT-4 does a surprisingly good job of separating causation from correlation
China stock sell-off will test securities firms’ risk managers
Regulatory measures to support stock market could add to risks facing securities sector
Most read
- Industry urges focus on initial margin instead of intraday VM
- For a growing number of banks, synthetics are the real deal
- Did Fed’s stress capital buffer blunt CCAR?