No soft landings in flight to safety from Russia

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.