How eight banks are weighing the fallout from the Ukraine war

March 9, 2022 9:00 PM

Russia’s two-week-old invasion of Ukraine has rapidly upended a wide range of global industries — from energy to entertainment to fast food.

Within the financial services sector, some of the biggest impacts have been on payments companies. Last weekend, Visa, Mastercard, American Express and PayPal all announced bans in Russia.

There have also been massive repercussions for Russian banks. Economic sanctions imposed by the United States and other nations have frozen large swaths of Russia’s financial system, including its access to the Society for Worldwide Interbank Financial Telecommunications, which processes international payments.

So far, the ripple effects for North American banks, which tend to have little or no direct exposure to Russia, have been much smaller. But if the war in Ukraine drags on, certain indirect risks will become more likely to have a material impact on the U.S. banking sector, according to analysts at DBRS Morningstar.

“One concern for the U.S. banking system is the potential for higher inflation for a longer period of time, especially considering the recent spike in energy prices,” DBRS Morningstar analysts John Mackerey and Michael Driscoll wrote in a research note this week. “If prolonged, this could lead to a weakening of asset quality metrics over the longer-term.”

Since Russia’s invasion on Feb. 24, executives at numerous U.S. and Canadian banks have spoken publicly about the impacts of the war and its economic fallout. Those impacts include both short-term effects, such as trading volatility, and potential longer-term effects, such as a scenario in which high inflation persists.

What follows is a look at what executives at eight large and regional banks have said recently about the conflict’s impact on their businesses.

Mark Kauzlarich/Bloomberg

JPMorgan Chase

The trading business at the largest U.S. bank by assets is getting pinched as conditions deteriorate in Ukraine.

Quarter-to-date performance was down 10% last Friday, and “things have changed since then,” Troy Rohrbaugh, JPMorgan’s global head of markets, warned Tuesday at the RBC Capital Markets Financial Services conference.

Due to turbulence, which is showing up in emerging markets tied to Russia and in markets affected by the various economic sanctions, JPMorgan will provide no further guidance for the first quarter, Rohrbaugh said.

“The markets are extremely treacherous at the moment,” he said. “There’s a lot of uncertainty. There are a lot of clients that are under extreme stress that creates potential very significant counterparty risk exposure, and the movements here are extremely significant and playing out in real time.”

Andrey Rudakov/Bloomberg

Citigroup

Citi is “very proactively” trying to reduce some of its $9.8 billion in Russia-related exposure, Chief Financial Officer Mark Mason said last week during the company’s investor day.

The $2.3 trillion-asset firm has been running various economic scenarios to get a handle on how much money it could potentially lose as the conflict escalates. On the high end, the figure could be “a little less than half” of the total exposure, Mason warned investors.

“But it could also be a lot less than that just depending on how the situation evolves,” he added.

Citi employs about 3,000 people in Russia and roughly 200 in Ukraine. The company’s Russian exposure represents only about 0.3% of its total assets.

Even before the conflict, Citi wanted to get out of consumer banking in Russia — one of 13 international markets that the company has been seeking to exit.

The war in Ukraine is stalling the company’s efforts to unload its Russia franchise and could result in a wind-down of the operation rather than a sale, Bloomberg reported Wednesday.

Scott Eisen/Bloomberg

Citizens Financial Group

Citizens Financial says the conflict in Ukraine isn’t affecting its commercial loan portfolio.

That’s because commercial clients are well versed in managing through crises, even as they continue to cope with inflation and ongoing supply-chain issues, according to Donald McCree, the company's head of commercial banking.

“As we went through COVID for the last two years, management teams got deadly serious about risk management,” McCree said Tuesday at the RBC conference. “They adjusted their cost structures. They adjusted their balance sheets. They built liquidity.”

Citizens, of Providence, Rhode Island, has no direct exposure in Russia, Ukraine or other European countries, according to McCree.

“So it’s really a U.S. economic story for us, and we think the backdrop of the U.S. economy is going to continue to be OK, although not as great as people thought it was going to be,” he said.

KeyCorp

Like Citizens, KeyCorp in Cleveland has no direct exposure to Ukraine and Russia, Chairman and CEO Chris Gorman said last week at the company’s investor day.

But the company does have commercial clients that do business in countries such as Ukraine, which could experience supply-chain disruptions because of the war, he said.

“As you can imagine, we’ve been doing a deep dive on this for the best part of the last month,” Gorman told investors. “I’m pleased to tell you that we have no meaningful exposure, as in zero.”

The $186 billion-asset company does have “some de minimis counterparty risk” through some European banks, “but we’re not worried about that,” Gorman added.

Bank of Nova Scotia

Canada’s Scotiabank has a large presence in Mexico, which so far has declined to impose economic sanctions on Russia.

In remarks Tuesday, Scotiabank Chief Financial Officer Raj Viswanathan was asked what would happen if one of the bank’s clients in Mexico wanted to transact with someone in Russia. He said that such transactions cannot be made because correspondent banking relationships run through the United States and Europe, which have imposed sweeping sanctions.

“So no money can move,” Viswanathan said at the RBC conference.

He also said that Scotiabank’s exposure to Russia is “immaterial to zero.”

Toronto-Dominion Bank

Amid the war in Ukraine, TD Bank has decided, at least for now, to take a more gradual approach to releasing loan-loss reserves that it built up during the pandemic.

That’s because the war is adding too much uncertainty to an economy already beset by a surge of inflation, an ongoing labor shortage and continued supply chain disruptions, CEO Bharat Masrani told investors last week during the company’s quarterly earnings call.

Regions Financial

Commercial customers of Birmingham, Alabama-based Regions are rapidly adjusting their economic outlooks as the crisis in Ukraine continues to worsen, according to CEO John Turner.

“Two and a half weeks ago I would have described the business community as being optimistic,” Turner said Wednesday at the RBC conference. “I would say, over the last two weeks, that optimism has probably changed to cautiously optimistic because we really don't know what the impacts of the current conflict in Ukraine might bring.”

Turner pointed to rising gas prices, the challenging labor market and supply chain headwinds as factors that are tempering some clients’ enthusiasm for the current and long-term business climate.

He said businesses “are being thoughtful” about the potential impacts of the conflict and how they might affect inflation.

Comerica

The cost of oil has been soaring as the United States and European countries have moved quickly to reduce or eliminate their reliance on Russian energy.

High oil prices typically benefit energy lenders such as Dallas-based Comerica, as companies in the oil and gas sector increase their borrowing to take advantage of fatter margins.

But Chief Financial Officer James Herzog said Tuesday that Comerica’s energy-sector customers are taking a disciplined approach.

“They’re hesitant to start doing a lot of additional investment just because of this current environment that we’re in. I think a lot of hard lessons were learned over this last decade-plus,” Herzog said in remarks at the RBC conference.

Consequently, Comerica is not expecting outsized loan growth in the energy sector as a result of recent events, according to Herzog.

“At this point in time, we’re seeing a lot of discipline on the part of our customers, and we’re fairly committed to see energy stay within proportion on our balance sheet,” he said.

Herzog also indicated that there may be a point when rising energy prices stop being beneficial to Comerica and other banks that specialize in energy lending.

“On the loan demand side, it’s great to see higher energy prices, to some extent. Of course you don’t want to see frothiness built in, and so there’s a limit to how high you want to see them go, because ultimately it has a spillover on other parts of the portfolio on the credit side,” he said.