Russia Fallout Hits $7 Billion for European Banks Pulling Back

(Bloomberg) -- European banks are counting the rising cost of Russia's invasion of Ukraine as they prepare for a wave of defaults that several fear will spread to the wider economy.

Led by Italy's UniCredit SpA, the industry has ratcheted up the amount of cash set aside to cover doubtful loans by the most in over a year. Alongside trading losses, writedowns and costs to exit the country, European lenders have so far flagged a hit of about $7 billion -- with the potential for more to come.

The economic impact of the war is already cascading across the world as commodity prices spike and corporate supply chains are disrupted. After years of benefiting from rapid growth in Russia, European banks are now asking themselves if it's still worth doing business in the world's most sanctioned country. At the same time, they're also divided on how broad the damage to the economy will be, meaning some banks face further costs if defaults spike.

As banks grapple with the uncertainty surrounding the broader economic damage, chief risk officers of several major European lenders are holding meetings among themselves and with regulators to discuss provisioning and other fallout, according to people familiar with the matter. One regulatory official, who spoke on condition of anonymity, said banks will probably stash more funds in coming quarters.

UniCredit said on Thursday that it's “positioned to incorporate possible spill-over macroeconomic effects” in its wider business thanks to its “strong” capital levels, asset quality and “sizeable overlay” on top of normal loan loss reserves. The Milan-based lender, one of the European banks with the biggest presence in Russia, earlier on Thursday took a 1.85 billion-euro ($2 billion) hit related to the country as it weighs whether to exit.

UniCredit Takes $2 Billion Hit on Russia to Cover Potential Exit

Other lenders, including Deutsche Bank AG, are focusing their provisioning more on Russian loans. The German lender said it considers it to be an “unlikely downside case” that supply chain bottlenecks translate into losses. Societe Generale SA's central scenario is for a “soft landing” for the economy, Chief Executive Officer Frederic Oudea said in a Bloomberg TV interview. He cited “monetary policy in Europe which will be very progressive.”

The French bank last month agreed to sell its Rosbank PJSC unit to the investment firm of Vladimir Potanin's, Russia's richest man, taking a hit of about 3 billion euros to exit. Oudea said on Thursday that it would be reflected in second-quarter results.

SocGen to Sell Rosbank to Billionaire Potanin in Russia Exit

Still, banks are prodding clients and drilling deep into their balance sheets to see which may have trouble paying back loans as the fallout widens. Raiffeisen Bank International AG, a big lender in eastern Europe and one of the largest foreign banks in Russia alongside UniCredit, highlighted 1.8 billion euros of exposure to auto parts and equipment and 1.2 billion euros related to chemicals and fertilizer industry as being most at risk.

Meanwhile, banks are also divided on whether to quit Russia altogether. UniCredit and Austria's Raiffeisen are still weighing their options, with Raiffeisen saying on Wednesday that its received interest from parties interested in buying its Russian business. Lenders with smaller outposts are already winding down in the country.