Banking stress tests

Written on the 09 | 03 | 2022

BANKING STRESS TESTS UKRAINE/RUSSIA

The year 2022 was supposed to mark the beginning of a new era for European banks: that of the first-rate hikes with fruitful revenue prospects. This was without considering the invasion of Ukraine by Russia. 

Indeed, the conflict in Ukraine may have broad implications for European banks, including higher loan loss provisions, commercial losses, and a delayed rate hike cycle. Shareholders will be affected in 2022, especially if European banks hit by the Ukraine crisis decide to reduce and stop their dividend payments. At this stage and in the absence of information regarding the duration of the war and its final magnitude, it is difficult to estimate the total impact.

However, the main European banks exposed to Russia, Ukraine, and Belarus issue press releases to inform investors of their exposures or not, with varying degrees of detail. The European banks with the highest exposure to Russia and Ukraine are Raiffeisen Bank International with an exposure of 13.7% (% of loan exposure), UniCredit with 1.9%, Société Générale with 1.8%, Intesa Sanpaolo with 1.2% and ING Groep with 0.6%. 

In order to get an idea of the potential loss on their Russian/Ukrainian subsidiary, we assessed the above-mentioned banks in much more severe stress scenarios than the so-called expropriation scenarios that have been published by some banks. 

Double stress test with strict assumptions Russia/Ukraine/Belarus:  

We assume in a first stress test (i) a 10% drop in group revenues, (ii) loan loss provisions of 10% of Russian/Ukrainian/Belarusian loans, (iii) nationalisation of the local entity with subsequent loss of equity, (iv) loss of intra-group funding, (v) 80% drop in risk-weighted assets of Russian/Ukrainian/Belarusian subsidiaries. We still add a 20% tax shield on items (ii), (iii), (iv).