European Banks' Russia, Ukraine Exposure Insignificant

The direct exposure of European banks to Russian and Ukrainian clients is insignificant. According to the Bank for International Settlements, claims on Russian counterparties from the major developed European countries' banks amount to 0.7% of the European banks' total claims reported to the BIS. Societe Generale and UniCredit have the most extensive exposure of the European banks we cover. EUR 12.4 billion or 4% of UniCredit's 2021 risk-weighted assets has Russian counterparties, while EUR 14.6 billion or 2.4% of Societe Generale's exposure at default is Russian. Their Russian operations contributed less than 3% of revenue and earnings for 2021. ING, Intesa Sanpaolo, Credit Agricole, Commerzbank, and BNP Paribas have smaller exposures. If we express the Russian exposures as a portion of equity, it becomes much more relevant, about 25% for both UniCredit and SocGen. However, we do not believe that the total exposures are at risk. Collateral and existing loan-loss reserves provide further protection. Also, the bulk of UniCredit's and Societe Generale's exposures are held through their fully funded Russian subsidiaries. In theory, they could walk away from these subsidiaries, limiting any losses to their equity investment in the subsidiaries. The equity investment in their respective Russian subsidiaries amounts to only 3% and 2% of capital for UniCredit and Societe Generale, respectively. We believe that the relatively low exposure of UniCredit and SocGen to Russia combined with their solid capitalisation makes the risk of a capital call highly unlikely even in the direst of outcomes. The average European bank that we cover now trades at undemanding multiples of 8 times our 2022 earnings and 0.7 times 2021 tangible book value. The sector now trades at 0.85 times our fair value estimate. We highlight narrow-moat ABN Amro (0.7 times P/FVE) and narrow-moat Lloyds (0.7 times P/FVE) as attractively valued. Neither bank is exposed to Russia or Ukraine.

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