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Market Volatility
Impact of the Russia-Ukraine conflict on European banks
Matteo Merlo
Equity investment analyst
March 3, 2022

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.

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