The Russia-Ukraine Conflict: European Banks Can Manage The Economic Spillovers, For Now

  • European banks can manage the economic spillovers from the Russia-Ukraine conflict under our base case that envisages business disruptions in certain corporate sectors and reduced but still positive economic growth in 2022.
  • It’s undoubtedly a trickier and more uncertain macroeconomic environment than we had envisaged at the start of 2022, and as a result we expect European banks will see lower loan and business growth, as well as a limited uptick in costs. But we do not see these effects as likely to significantly test our view of the creditworthiness of most European banks.
  • The conflict has reshuffled and worsened our downside scenarios. European banks are not all equally vulnerable to these downside scenarios, so if they become more likely to play out, we would expect differentiated rating actions–either across national banking sectors or on individual banks.
  • If downside risks were to materialize, we would also expect European governments and central banks to intervene to somewhat dampen the effect on the real economy and indirectly on banks.

European banks have sufficient resilience to manage the broader economic spillovers from the continuing Russia-Ukraine conflict, under our base case. For that reason, our outlook for European banks for 2022 remains broadly stable. Still, S&P Global Ratings expects lower loan and overall business growth this year, with a limited uptick in operational costs and cost of risk in selected corporate portfolios. However, if the events in our revised, more severe downside scenarios play out in whole or part, they could weaken the creditworthiness of some banking sectors or banks.

As we have already noted, the direct financial exposures of European banks to the countries involved in the war are limited overall, with only a handful carrying on meaningful business in Russia, Ukraine, or Belarus, and none having high cross-border exposure (see “How The Conflict In Ukraine Is Affecting Financial Institutions Ratings,” published on March 4, 2022). For these institutions, some financial losses are inevitable but will generally remain manageable given existing buffers and overall business diversification. More complex and time consuming for executives will be operational management of this crisis, as the fate of their Russian subsidiaries is likely to remain in the balance for a while.

Our baseline scenario, which has not changed since we adopted it on March 3, 2022, includes these key assumptions:

  • The conflict in Ukraine will dampen activity for one to two quarters;
  • The war does not extend to other countries or involve unconventional weapons;
  • Russian exports of oil and gas to the EU will not be cut off;
  • Commodities prices, especially oil, should ease gradually once the conflict stops; and
  • Supply chains will not be permanently disrupted.

On the other hand, we’ve revised the downside risks for European banks, which we believe have increased significantly and comprise:

  • A Russian energy hard stop,
  • Persistently high inflation, and
  • A wholesale market repricing.

Sensitivities to these downside scenarios vary across European banking systems. Should one or more materialize, we expect that government intervention on the fiscal side would somewhat dampen the effect on the real economy–and on banks.

Direct European banking exposures to the countries at war are limited and involve a small number of banks

Direct financial linkages between European banks and the countries involved in the war (Russia, Ukraine, and Belarus) have decreased so sharply in recent years that they are now negligible at a system level. Exposures to counterparties in these countries represented €92 billion or 0.3% of total assets for EU banks at the end of 2021. Deposits received from the same counterparties were also minimal at only €85 billion or 0.4% of total deposits. However, there are some notable differences, with Hungary and Austria as relative outliers due to the activities of OTP Bank and Raiffeisen Banking Group (RBG), in Russia and Ukraine, respectively (see chart 1). In Latvia, the share of nonresident deposits (mainly from Russia) has fallen in recent years and is now small, although nonnegligible (3% of total deposits). For these countries, we do not see any meaningful risk at the system level in spite of the relatively higher direct exposures.



Four European banks have a meaningful presence in Russia or Ukraine or both. Given the magnitude of the economic recession that we expect in both countries, we believe that credit losses will inevitably mount in the local subsidiaries. As a result, we have lowered the stand-alone credit profile of OTP and have maintained the negative outlook on the ratings on RBG. Société Générale announced on April 11 that it would sell its Russian subsidiary. This transaction will lead to a €2 billion write-off for the group, reducing its common equity Tier 1 ratio by 20 basis points, according to the bank’s estimate. This will merely lower our projected RAC ratio to the lower end of our previously estimated 9.0%-9.5% range by end-2023, and carries no rating implications (see “Societe Generale’s Russia Exit With Rosbank Sale Will Have Manageable Capital Impact,” April 11, 2022).

UniCredit has not yet made an announcement about the future of its Russian subsidiary. However, we estimate that a write-off of the equity value of its Russian subsidiary–similar to Société Générale’s–would also be manageable for the group.

More uncertain for European banks will be the performance of cross-border exposures to Russian corporates. We expect most banks to determine that there was a significant increase in the credit risk of these exposures, meaning a migration to Stage 2 under IFRS 9 and a subsequent increase in provisions.

Under our base case, economic spillovers from the war will be manageable for European banks, with some differences across systems

We expect that spillovers from the Russia-Ukraine war will result in lower-than-expected business and profit growth this year. After a “feel good” year in 2021, we saw few reasons to be optimistic earlier this year about preprovision profitability or overall returns for 2022 (see “The Top Trends Shaping European Bank Ratings In 2022,” Jan. 31, 2022). In our view, the outbreak of the war and its spillover to European economies confirms this view.

We see three main potential indirect economic effects from the war: disruptions in selected corporate sectors, reduced economic growth, and tightening funding and liquidity conditions. We see these three drivers affecting European banking systems differently (see chart 2), but with no driver delivering a big hit in any country. For this reason, we have not lowered our Banking Industry Country Risks Assessments (BICRAs) in Europe since the war began and have not altered our view about BICRA trends for most systems .



First , higher energy prices and supply shortages will affect certain corporate sectors such as utilities, the most energy-intensive manufacturing sectors, and construction (see “Russia-Ukraine Conflict: Implications For European Corporate And Infrastructure Sectors,” March 16, 2022). For banks, this will in turn lead to lower loan and business growth in these corporate segments and an uptick in cost of risk in selected portfolios with weaker borrowers. We see certain Central and Eastern Europe (CEE)–and to a lesser extent Italy’s and Germany’s–as most exposed to this first transmission channel, given the relative importance of the manufacturing, utilities, and construction sectors in their economies and labor market (see charts 4 and 5).



Second, we expect the war will slow overall economic activity in Europe for one to two quarters. As a result, our economists forecast that EU and U.K. growth will slow, not stall, to 3.3% and 3.5% a year in 2022. However, the magnitude of the slowdown varies from country to country, with Baltic and CEE countries hit hardest, largely due to their trade links with and energy dependence on Russia (in the Appendix, see charts 6a-6d for our GDP forecasts and 7a-7c for our inflation forecasts as well as “Sovereign Risk Indicators,” April 11, 2022.) However, we do not expect that any European country will see GDP decline in 2022 or 2023, and the impact on unemployment should remain muted overall. In this context, although European banks should see slower-than-expected loan growth and overall reduced business prospects, overall asset quality should hold up. Operating expenditures could rise as and when banks translate some of the increased inflation into staff costs. But, under our baseline, the energy price shock triggered by the war will likely remain temporary and, therefore, the uptick in banks’ operational costs should remain short lived.

Third, Russia’s invasion of Ukraine did not trigger an immediate financial stress event for European banks. There was some market volatility on the first days of the conflict, including some increase in prices for credit default swaps, especially in non-euro CEE countries as well as Cyprus (see chart 8). But the impact on bank funding conditions has remained overall very limited. Before the war, we expected that funding conditions would gradually tighten in 2022 and 2023 as central banks normalize their monetary policy. Our thinking is that central banks will broadly stay the course and not accelerate their policy moves. We still expect the European Central Bank to raise interest rates for the first time at the end of 2022, and the central bank to raise policy rates only gradually to 1.5% by 2024. This gradual rise in interest rates, in an environment of reduced but still positive economic growth, should provide some moderate uplift to banks’ margins over time, thereby partly offsetting the rise in operational and risk costs related to the war.


Beyond the moderate change to our baseline expectations, the Russia-Ukraine war has reshuffled and significantly increased our views about the potential downside risks (see “Credit Conditions Europe Q2 2022: Seismic Shocks, Security & Supply,” March 29, 2022). For banks, we believe the most relevant downside scenarios are now:

  • A Russian energy hard-stop scenario,
  • A persistent high inflation scenario, and
  • A wholesale market repricing scenario.

These scenarios are not mutually exclusive and so could occur in isolation or in combination. Although almost all European banking systems would be affected under these downside scenarios, some would be more at risk than others (see chart 9).



The Russian energy hard-stop scenario. This involves a curtailment of Russian energy supplies to Europe due to sanctions or countersanctions, triggering a further energy price shock and supply chain disruptions. It would bite hardest in economies with the highest direct reliance on Russian energy (see chart 10), possibly leading to some form of rationing. After deciding on a ban on Russian coal, EU governments are considering a ban on Russian oil and gas, the latter being potentially the most sensitive for European economies. Most vulnerable to this downside risk are Lithuania, Hungary, Poland and Slovakia, as well as Germany, Austria, and Italy.



Persistently high inflation scenario. This would reduce corporate and household debt-servicing capacity, with potential ripple effects on asset quality for banks in the countries. A key question under this scenario is how much corporates and households would manage to raise their revenues–by passing on higher input costs to customers for corporates, through higher wages or fiscal transfers for households–to match the inflation level. Most exposed to this downside risk would be banking systems with the highest corporate and household leverage (see chart 11).However, in several countries with elevated leverage such as the Nordics, Switzerland, or the Netherlands, high levels of financial assets and strong social safety nets have supported a strong track record for asset quality over time. We are mindful that a higher inflation scenario would have multiple repercussions, not only increasing costs and some asset quality pressure on banks, but also leading to potentially higher interest rates, which could potentially lift net interest income for banks able to reprice their assets fastest (see “When Rates Rise: Eurozone Bank Earnings Will Too–Especially For Retail,” Feb. 17, 2022). This scenario becomes most problematic if economies move into stagflation, characterized by low or negative economic growth, high inflation, and significantly rising corporate insolvencies and unemployment.



A wholesale market repricing scenario. This would feature a significant widening of spreads, which could be triggered by central banks frontloading their policy rate decisions in response to persistently high inflation. This would hurt the weaker sovereigns, corporates, and banks the hardest, including countries with a floating currency that they may need to defend. The banking systems most vulnerable to this downside risk are Hungary, Poland, as well as Greece, Cyprus, and Italy (see chart 12).



Importantly, government intervention could soften the blow from these downside scenarios. As the COVID-19 pandemic has shown, European governments would likely intervene to provide fiscal support and dampen the spillover effects on the real economy, at least in the short term, in case one or more of these downside risks were to materialize. Such interventions would support bank creditworthiness and are more likely in countries with strong fiscal capacity (such as Germany or the Baltics) and a strong social safety net. But, faced with yet another external shock and a war at its borders, we expect that some form of European financial solidarity would also be engineered to support weaker countries.