Capital IdeasTM

Investment insights from Capital Group

Categories
Market Volatility
Impact of the Russia-Ukraine conflict on European banks
Matteo Merlo
Equity investment analyst

Russia’s military aggression against Ukraine, which has become Europe’s largest ground war in generations, has impacted millions of people and triggered a large-scale humanitarian crisis as vulnerable Ukrainians take shelter or flee their homes. The intensification and spread of the conflict is deeply troubling and is having a devastating impact on those people caught in the crisis.


This article focuses on potential market and economic implications of the conflict.


The direct exposure that European banks have to Russia is limited, and that too is spread among a few banks. According to Bank for International Settlement (BIS) data as of September 30, 2021, overall exposure of European banks amounted to €70 billion and foreign bank exposure in aggregate was roughly $104 billion. I’m focused on potential secondary impacts, which are difficult to quantify at this stage and will depend on how long the conflict lasts and how it evolves.


The impact of exclusion from the SWIFT system seems to have been limited so far. Only seven Russian banks will be disconnected from the global messaging system for financial transactions, excluding both Sberbank and Gazprombank.


There might be some impact on dividends, however. So far, only Raiffeisen Bank has canceled the 2021 dividend, and it is likely an outlier. No other bank has signaled any change in the dividend policy. I do see some downside risk to return of capital, and in particular to buybacks, but not a broad policy ban on dividends.


There’s no doubt that European banks need higher interest rates in Europe to improve their net interest margins, and the rise in rates has been put in question with this geopolitical shock. That said, the valuation of European banks is not yet discounting a higher rate regime.



Matteo Merlo is an equity investment analyst at Capital Group with research responsibility for banks and asset managers in Western Europe. He has 12 years of investment industry experience and has been with Capital Group for two years. Prior to joining Capital, Matteo worked as an executive director at UBS Asset Management. Before that, he was a senior equity and credit analyst at Generali Investment Europe. He holds both a master's and bachelor's degree in economics and finance from Cà Foscari University of Venice, graduating cum laude. Matteo is based in London.


Past results are not a guarantee of future results. The value of investments and income from them can go down as well as up and you may lose some or all of your initial investment. This information is not intended to provide investment, tax or other advice, or to be a solicitation to buy or sell any securities.

Statements attributed to an individual represent the opinions of that individual as of the date published and do not necessarily reflect the opinions of Capital Group or its affiliates. All information is as at the date indicated unless otherwise stated. Some information may have been obtained from third parties, and as such the reliability of that information is not guaranteed.

Capital Group manages equity assets through three investment groups. These groups make investment and proxy voting decisions independently. Fixed income investment professionals provide fixed income research and investment management across the Capital organization; however, for securities with equity characteristics, they act solely on behalf of one of the three equity investment groups.

Marketing communication

Past results are not a guarantee of future results. The value of investments and income from them can go down as well as up and you may lose some or all of your initial investment.

The information included on this site is of a general nature, and is not intended to provide investment, tax or other advice, or to be a solicitation to buy or sell any securities. It does not take into account your objectives, financial situation or needs. Before acting on the information you should consider its appropriateness, having regard to your own investment objectives, financial situation and needs. While Capital Group uses reasonable efforts to obtain information from third-party sources which it believes to be accurate, this cannot be guaranteed.

Statements attributed to an individual represent the opinions of that individual as of the date published and may not necessarily reflect the view of Capital Group or its affiliates. American Funds are not registered for sale outside of the United States.

This communication is issued by Capital International Management Company Sàrl (“CIMC”), 37A avenue J.F. Kennedy, L-1855 Luxembourg, unless otherwise specified, and is distributed for information purposes only. CIMC is regulated by the Commission de Surveillance du Secteur Financier (“CSSF” – Financial Regulator of Luxembourg) and is a subsidiary of the Capital Group Companies, Inc. (Capital Group).

In Hong Kong, this communication has been prepared by Capital International, Inc., a member of Capital Group, a company incorporated in California, United States of America. The liability of members is limited.

In Singapore, this communication has been prepared by Capital Group Investment Management Pte. Ltd., a member of Capital Group, a company incorporated in Singapore.  This advertisement or publication has not been reviewed by the Monetary Authority of Singapore. Neither has it been reviewed by any other regulator.

In Australia, this communication is issued by Capital Group Investment Management Limited (ACN 164 174 501 AFSL No. 443 118), a member of Capital Group, located at Suite 4201, Level 42 Gateway, 1 Macquarie Place, Sydney, NSW 2000 Australia.