European banks have underperformed the market by around 15% since the start of the conflict in Ukraine. While some face significant risks in tangible net asset value (Tnav) and capital, all suffer from concerns about weaker economic growth and a slower pace of interest rate normalization.
Italian and French banks, Berenberg stressed in a report today, present a high direct risk. Banks in France, Italy, Austria and the United States account for 75% of the exposures to the two economies: Russian and Ukrainian. Among the banks that the broker covers, Unicredit has the greatest direct risk. “We estimate that by devaluing all Russian and Ukrainian exposures, Unicredit should face an erosion of 12% of the Tnav and a drop of 150bps compared to its Cet1 capital ratio”, underlines Berenberg.
A risk partially mitigated by Unicredit’s high capital levels with a Cet1 ratio of 15%. While this helps to absorb any pressure, it limits the bank’s flexibility to participate in mergers and acquisitions. Unicredit’s business plan foresees 100-150 bps above the target for M&A. In the event of a devaluation, you may need to choose between a bolt-on M&A transaction or keep its payout policy high. “We expect him to prioritize the distribution of capital,” Berenberg said, recalling that the outlook on return on capital was one of the key reasons for Unicredit’s outperformance before the Russian-Ukrainian conflict. “We estimate 9% and 100 basis points for Societe Generale, 8% and 100 basis points for Credit Agricole, 7% and 110 basis points for Intesa,
In addition to these direct risks, expectations of lower GDP growth and a slower pace of rate hikes by central banks have weakened lenders’ share prices. This, of course, was more pronounced in the euro area. Prior to the conflict, the market had expected the ECB’s deposit rate to rise from -50bps to zero by the end of the year. Now discount a 20 basis point increase. Interest rates prospects for the UK, the US and Norway are less affected in light of weaker economic ties with Russia (the value of exports and imports from Russia represents 0.5% of GDP versus 1.6% for the eurozone). “We therefore expect banks in these regions to face less indirect risk than those in the Eurozone”,
A 7% outperformance compared to competitors in the euro zone justified, according to the broker, who recommends the purchase of NatWest and Barclays. While the “safe haven” status of Nordic banks is slightly undermined by exposure to the Baltic: Nordic banks have historically outperformed during crises. Yet, if exposures to Russia and Ukraine are limited, exposures to the Baltic area may raise some concern for trade links with the Russians (imports and exports to Russia amount to 7-16% of GDP) .
However, “we believe that Nordea and DNB, hedged with a rating buy, and Handelsbanken, hedged with a rating hold, are strong defensive candidates, as their exposures to the Baltic, Russia and Ukraine are insignificant, and they also offer solid return on capital prospects: we expect cash returns of 6-8%, plus buy-back, “says Berenberg. It is also true, he adds, that some eurozone banks appear to be oversold: Ing and Societe Generale are, not Credit Agricole which “presents a downside risk. Its Cet1 of 11.9% provides a relatively limited margin of error” , warned Berenberg that, in a separate note this morning, he raised the rating on Societe Generale from sell to hold.
“The gross exposure of Societe Generale’s loans to Russia and Ukraine is 32% of its Tnav. Hence, it is the second most exposed bank in Europe. Yet, our analysis indicates a 9% risk for the Tnav and of 100bps for its Cet1. Although significant, with a 40% decline the stock has already largely discounted this risk “, concludes Berenberg. (All rights reserved)
