Societe Generale may compensate depreciation of its Russian assets

Societe Generale lost almost a third of its market value in one month: its dependence on Russia, where its subsidiary Rosbank is 99.97% the country’s leading foreign bank, and its active policy in Eastern Europe. exceptional results in 2021 and its group strategy, largely validated by the market.

So the bank came out this morning to detail its situation in both Russia and Ukraine. An exercise that deserves special attention as European banks still remain somewhat uncertain about their obligations in Russia.

Transparency of the impact of each of the European banks on the Russian economy remains relatively limited and it is too early to make an accurate assessment financial implications for each institution”so sorry Skander Benciku, Analyst Manager at Lazard Freres Gestion.

The group confirms their revelation in detail “limited” to Russia, i.e. 1.7% of the total, i.e. 18.6 billion euros as of December 31, of which 15.4 billion (83%) are accounted for by a subsidiary of Rosbank.

From the balance, i.e. 3.6 billion euros, 2.6 billion euros on the balance sheet and 600 million off-balance sheet. In essence, this is financing from wholesale banking services with “leading counterparties” in the sectors of metallurgy and metals (2.2 billion) and energy (700 million). The bank clarifies that the sanctions prohibit any new transaction, but not the outcome of existing transactions, for example, loan repayment.

Rosbank weighs less than 3% of net profit

The activities in Russia then account for a total of 2.8% of the group’s net banking income in 2021 and 2.7% of net income. Thirdly, Societe Generale has always advocated a prudent policy in its activities in Russia, especially in terms of risks, with a diversified clientele, both individuals (41% of outstanding loans, mainly mortgage loans and car loans) and companies (31% of outstanding credits). loans), 80% for large companies.

These exhibits are “wide” nominated in rubles, 99% for individuals and 68% for companies. The subsidiary also has $3.7 billion in Russian government or similar bonds, including $1.2 billion in government securities.

Currently no reserve

Finally, the group reiterates its financial soundness with a CET1 solvency ratio of 13.7% at end-2021, enough to cushion a strong shock that will reduce the value of its €2.1 billion account-registered Russian assets. 2021 (and 500m subordinated debt) to zero. The impact of this scenario would be 50 basis points on the solvency ratio, and “will not call into question the payment of dividends for fiscal year 2021”defines a (long) press release.

After all, as of today, the group does not intend to create new reserves, and this position, however, will be updated after the publication of the results of the first quarter of 2022. Of course, these risks do not take into account the effects of contagion. crisis, such as lower interest rates or falling markets, but also, and above all, the bank’s “corporate” clients, who themselves are exposed to Russian influence. Large groups are and will be affected (Renault, TotalEnergies, Engie…) as well as many small and medium enterprises or ETIs. Fortunately, the companies with the highest margins have been able to create a solid financial cushion in 2021.

However, Societe Generale will have to explain its presence in Russia as a clear risk since 2014, the date of Russia’s annexation of Crimea, and the first Western sanctions. However, it must be admitted that Rosbank is a very profitable subsidiary.

Pressure on the banking sector

Societe Generale’s initiative should be followed and other French banks, BNP Paribas and Crédit Agricole, should be encouraged to specify their commitments in Russia. For now, it’s (almost) the status quo. BNP Paribas lists gross exposures, both on-balance sheet and off-balance sheet, to Russia at 0.07% of the group’s gross exposures (and 0.09% to Ukraine).

“Given the way the bank operates in these two markets and backs its operations with a significant level of guarantees and collateral, the real risk is more limited. The combined net residual exposure of BNP Paribas in Russia and Ukraine is therefore approximately EUR 500 million.” the bank says. However, the group is one of the world’s major banks in financing the energy sector.

For its part, Crédit Agricole SA estimates its gross exposure in Russia to be less than 0.5% of its total liabilities. However, the group has just been detained by the NGO Reclaim. “for financial support of energy companies operating in the coal, oil and gas industry of Russia”. In its response, cited by AFP, the mutual bank specifies that its investment bank “only as an exception dealt with Russian contractors and only in response to the need for goods and services necessary for Europe.”

However, the crisis hit the banking sector hard. After recovering more than 40% in 2021, nearly double the equity market average, and having a very good start to the year, listed European banks saw almost a quarter of their capitalization evaporate between February 10 and March 1.

A sector capable of absorbing a Russian blow

According to the Bank for International Settlements (BIS, “the central bank of central banks”), international banks’ exposure to Russia in 2021 will be about $120 billion (up from $220 billion in 2014). Which is modest for the eleventh largest economy in the world, which is very busy in raw materials. The 2014 sanctions clearly had a chilling effect, especially for US banks.

However, Citigroup has announced a $10 billion Russian opening, notably through its retail banking subsidiary in Russia. In Europe, the Italian bank UniCredit and the Austrian bank Raiffeisen have the largest stakes in Russia, at $14 billion and $23 billion, respectively.

“Banks are able to overcome difficulties that will arise due to economic sanctions imposed on RussiaSkander says to Bencik : “On the one hand, the displayed risk likely overstates the maximum risk package, and on the other hand, during the 2008 financial crisis, the financial system had to face nearly $1,000 billion in losses.” In other words, in an extreme 100% loss scenario, the Russian crisis would have ten times the impact of the 2008 financial crisis.

Ten times less severe than the 2008 crisis

However, the crisis can provoke many destabilizing factors for banks. The risk of lower growth or even a recession mixed with stagflation (lower growth, higher prices) is clearly the main risk for banks. On this occasion “the role of central banks will be key”, as Nicolas Teri, president of the national confederation Crédit Mutuel, recalled.

“The second risk factor will be the fall in rates observed in the markets”continues the manager. But central banks will not be able to ignore inflationary pressures that are mounting as gas, oil and some food prices rise. “In general, the downturn in the banking sector already takes into account the worst-case scenario in which banks lose most of their liabilities,” concludes Skander Benciku.

The feeling that is widespread in the markets, despite the severity of the crisis, is that we remain optimistic and wait for interesting entry points to return to the values.