What happened
Shares of several European bank stocks fell Friday as banks with business in Russia begin to see direct or indirect effects of the sanctions imposed on the country. Shares of investment banking giant Deutsche Bank(NYSE: DB) fell almost 10.7%, while Dutch bank ING Groep(NYSE: ING) fell by a little more than 10.7%, and Germany's Commerzbank(OTC: CRZB.Y) was off by nearly 12.5%.
So what
The Financial Times recently reported that Deutsche Bank's key technology centers in Russia, which do critical work on software that helps power the bank's investment banking and corporate banking system, could be cut off. Those tech centers are in Moscow and St. Petersburg; Deutsche Bank employs more than 1,500 people in Russia. These employees, according to Financial Times, not only help create critical software for the bank but also do key maintenance work.
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A senior executive also told the FT that the bank is contemplating moving workers out of Russia. "All options are currently on the table," the executive said. Deutsche Bank has, however, been running stress testing exercises, and has so far determined that there is no pervasive risk to its IT infrastructure.
Meanwhile, ING recently released information that shows it has about 700 million euros worth of loans in Russia that are being impacted by sanctions and 2.5 billion euros of collateral in place. In total, ING said it has 5.3 billion euros worth of outstanding loans in Russia -- roughly 0.9% of its total loan portfolio. ING added that it did not expect any "material effects" from the decision by the U.S., U.K., and European Union to bar seven major Russian banks from accessing SWIFT (the Society for Worldwide Interbank Financial Telecommunication, a messaging system that financial institutions worldwide use to exchange data that's vital for facilitating transactions between them).
ING said it has about 500 million euros worth of loans in Ukraine -- 0.1% of its total loan book. There's about 200 million euros worth of collateral in place supporting this exposure, the bank said.
Finally, Germany's Commerzbank also owns a subsidiary in Russia, which a task force has apparently been monitoring daily, according to Reuters.
Now what
Prior to Russia's invasion of Ukraine, I think a lot of investors had been looking at European bank stocks more favorably. They had built up high levels of capital, they'd been holding up through the pandemic, and they looked like they would benefit if the European Central Bank raised its benchmark lending rate as expected this year.
These three banks don't have a ton of exposure in Russia or Ukraine. ING, with about 1% of its total loan book in Russia and Ukraine, looks to be the heaviest in terms of actual exposure. Deutsche Bank only collected about 45 million euros of net revenue in Russia and 4 million euros of net revenue in Ukraine in 2020, according to its annual report for that year (the latest available). Additionally, Commerzbank said it has about 2 billion euros of exposure, most of which is in Russia.
I think these banks will all be OK in the long term, but more turbulence is possible in the near term.
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