Analysts feared that European banks in Russia would suffer as the economy took a downturn but in fact they have fared better than expected.

In the past Russia has been a major revenue driver for many European banks, a position that became threatened as the country descended into recession in late 2014. As The Banker discussed last December, foreign banking franchises in the country often delivered disproportionately high profits, given their share of the parent’s assets. The half-year results for the largest foreign-owned lenders in the country show this is still the case, with UniCredit, Raiffeisen Bank International (RBI) and Nordea all churning out high profits so far (see chart one).

Chart one 2

Nordea and RBI weathered the downturn exceptionally well, as their year-on-year net profits in rouble terms increased by 42% and 15%, respectively in the first six months of the year.

Ironically, Nordea benefitted from the downturn in the rouble. The bank, which is a subsidiary of a Swedish parent, focuses on providing funding to the largest Russian corporates and international Nordic companies from which it receives income in dollars and euros. Nordea has been able to leverage that by growing its corporate loan book and freezing the unprofitable retail unit in the past six months.

This model has proved sustainable so far, as the corporate non-performing loans have stayed close to zero for several consecutive quarters. In a press release, the bank’s CEO, Igor Bulantsev, expressed plans to pursue this strategy into the third quarter.

The situation was different at RBI. Income from the bank’s prominent wholesale and retail arms shrunk in the first six months of the year, while loan impairment provisions doubled. However, the business was buoyed by the high interest rates; the net interest margin at the bank was 5.6% and the net profits of the subsidiary accounted for 55.2% of the group profits, even though only 11.32% of the bank’s assets are located in Russia (see chart two).

Chart 2

UniCredit, which is the largest foreign bank in the country, is the only one of the three not to see profits grow in rouble terms – it recorded a year-on-year decline of 15% – but the unit still delivered 12% of group profits even though it holds only 2.36% of the total assets.

Like RBI, the bank benefited from high interest rates, as its net interest income rose by 22% and trading income more than doubled. This was countered by the deterioration of the loan portfolio, which forced the bank to write down twice as many loans as a year ago.  

Still, some foreign banks found themselves facing the effects of the Russian recession full on. Société Générale, which owns the second largest foreign subsidiary in the country, Rosbank, saw its operation post a net loss of Rbs6.38bn, against a profit of Rbs2.66bn a year ago. The bank places emphasis on retail banking – in 2014, the retail unit contributed 65.4% of the total operating income.  

Other foreign banks are considering leaving Russia altogether. Deutsche Bank has put an exit on the table as it undergoes restructuring. In March, Standard Chartered announced that it would close down its representative there, and many other foreign institutions are now in the process of retrenching their local businesses.

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