European bank stocks fall as war in Ukraine escalates

European bank stocks were under outsized pressure on Friday amid a market sell-off as Russia stepped up its attack on Ukraine with the bombing of a major Ukrainian nuclear power plant.

Major US and European stock indices fell on uncertainty surrounding economic growth due to the Ukraine crisis, the resulting sanctions against Russia and the prospect of higher inflation.

Most European banks have limited direct exposure to Russia or Ukraine, which could hurt their asset quality or earnings, analysts said. But their lending and investment banking businesses remain at risk if the war triggers a broader downturn that cuts consumer spending and discourages business investment.

These risks were evident on Friday as the Euro Stoxx Banks Index recently traded down more than 6%, compared to a 2.5% drop in the broader Stoxx Europe 600 Index. Among individual lenders, HSBC Holdings PLC recently fell 4.1%, while UBS Group AG fell. 5.5%.

Falling bond yields were likely another driver of underperformance in bank stocks. Investors sought safety in bonds amid an intensified attack from Russia, sending prices higher and yields lower. Lower interest rates can eat away at the profits banks generate on the spread between the rate they pay depositors and the interest rate they charge to provide loans.

French company Societe Generale SA was among the hardest hit banking stocks, trading down 8% due to the additional challenge it faces as owner of Rosbank PJSC, a Russian lender. Still, Paris-based Societe Generale said on Thursday it had enough financial leeway to absorb the consequences should it be deprived of rights to its banking assets in Russia.

The bank’s Russian business generated 2.8% of the company’s net banking income and 2.7% of net income in 2021.

Italy’s UniCredit SpA, which owns AO UniCredit Bank, one of Russia’s largest commercial banks, suffered a larger drop in its share price, trading down more than 12%. In January, UniCredit said it saw no major impact from Russian-Ukrainian tensions, noting that its business in Russia accounted for about 3% of total revenue.

The sharp drop in the Russian ruble, which hit a record low earlier this week against the US dollar, is another reason Societe Generale and UniCredit could suffer. Indeed, the value of the assets of the Russian subsidiaries of the banks and the income generated by these units are lower when converted into euros, the presentation currency of the two banks.

The depreciation of the Russian currency “will likely lead to an erosion of parent bank capital,” Moody’s Investors Service said in a report on Friday. “Nevertheless, we consider that the parent banks can absorb the impact,” the rating agency said.

Germany’s Deutsche Bank AG also suffered from its exposure to Russia, where it operates a technology center with 1,500 workers.

“It is clear that the invasion of Ukraine will have an impact on the bank…but we…are confident that the day-to-day running of our business operations will not be affected,” a spokesperson said in a statement. press release sent by e-mail.

Deutsche Bank’s stock recently fell 9%.

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