(Finance) – The profits of Russian activities of the Austrian Raiffeisen Bank International (RBI), of the Italian UniCredit and Hungarian OTP Bankthe European banks with the largest exposure to Russia, continue to increase despite regulatory pressure to accelerate exit plans, Scope Ratings says in a report on the topic.
RBI, UniCredit and OTP Bank saw their combined net profits in Russia grow 9.1% year-on-year in first half of 2024 to 1.2 billion euros (first half of 2023: 1.1 billion euros). Full-year earnings were 2.2 billion euros in 2023 and 2 billion euros in 2022.
RBI maintained thehigher exposure of the three at the end of June 2024, with 17.2% of risk-weighted assets remaining in Russia, compared to 5.1% for UniCredit and 4.8% for OTP Bank.
Details of the three banks
The Russian unit of RBI remains its most profitable unit, accounting for about half of the group’s net profits. Net profit in Russia increased by 2.8% year-on-year in the first half of 2024 to 705 million euros, mainly due to the release of provisions. Operating profits fell by 17%.
Net profit of UniCredit in Russia grew 21.3% year-on-year in the first half of 2024 to EUR 329 million, driven by revenue growth and lower operating expenses (which led to 12.5% growth in operating profit) and the release of provisions. The contribution to group earnings was approximately 6%, unchanged year-on-year.
Net profit of OTP Bank in Russia jumped 11.5% year-on-year to HUF 57.2 billion, while its share of the group’s net profit rose to 11.3%. This was achieved by increasing operating profit by 48% year-on-year, offsetting the higher cost of risk and the tax burden on dividend payments.
Scope’s analysis
The major ones reputational, legal and financial risksincluding asset seizures amid international sanctions, have prompted a cautious approach that will persist, particularly given the risk of fines or termination of correspondent banking relationships following potential sanctions investigations by European or US financial authorities. However, the report highlights, in the event of disorderly exits, such as deconsolidation of Russian subsidiaries and write-downs of intra-group exposures, the impacts on consolidated capital adequacy should be manageable for groups.
“The process of deconsolidating Russian subsidiaries is challenging, given local legislation and the need for multi-stage approvals. We believe the recently announced deconsolidation plans are constructive, although not entirely consistent with regulators’ calls for an accelerated exit from Russia,” said Milya Safiullina, an analyst on Scope’s financial institutions team. “We see a open dialogue with regulators and financial authorities as an important cornerstone of constructive decision-making for banks, as they focus on an orderly exit from their Russian assets.”
The report highlights that the profits are mainly driven by the spread between the interest rates paid to Russian depositors and the interest rates offered by the Russian central bank. While European banks have limited new lending activities in recent quarters in an effort to reduce their presence in Russia, they have seen a very large inflow of deposits, increasing their liquidity. A significant amount of excess liquidity from Russian subsidiaries is deposited with the Bank of Russia.
“AND possible to make profits without expanding or even reducing the customer base – Safiullina said – Another reason is the release of large loan loss provisions, as asset quality trends have been stronger than banks had anticipated since February 2022, when international sanctions increased dramatically.”
The other banks
Among other large banks, the rating agency highlights the exposure of Deutsche Bank, ING, Commerzbank And Intesa San Paolo to Russia is limitedwith less than 0.1% of customer loans and declining cross-border exposure. The share of net profits related to Russia at the group level was also insignificant in 2023.
Only a few foreign banks were able to sell their activities in Russia, and in that case with great losses. General Society And HSBC have sold their Russian units; Intesa Sanpaolo has obtained approvals to divest its assets in the country, but the deal has not yet been completed.