Deutsche Bank quantifies its Russia risks for the first time

A day before CEO Christian Sewing presents his new strategy, the money house is now trying to calm investors. “Our direct risk positions are currently very limited and are strictly managed,” said risk director Stuart Lewis in a statement on Wednesday evening. “We are closely monitoring and evaluating the second and third round effects arising from the current situation, including sanctions and cyber risks.”

According to the report, the bank’s net credit exposure related to Russia at the end of last year was EUR 0.6 billion after taking into account guarantees and collateral. The gross loan commitment was therefore 1.4 billion euros, which corresponds to around 0.3 percent of the entire loan book of the institute. The bank estimates net credit exposure related to Ukraine at EUR 42 million.

In addition, the money house emphasizes that most of its derivative positions related to Russia have now been settled. Loans to asset management customers from the crisis region are adequately secured and the collateral has no connection to Russia.

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Deutsche Bank has significantly reduced its presence and involvement in Russia since the annexation of Crimea in 2014 and has reduced it again in the past two weeks, according to the statement. However, investors are no longer just worried about direct exposure to Russia. Shareholders fear that the macroeconomic risks posed by the war could jeopardize Sewing’s recovery efforts.

Operational risks in Russia

The rapid increase in energy prices is fueling fears of a global recession, which could lead to higher bank defaults. In addition, the turnaround in interest rates that banks have been hoping for for a long time could be postponed as a result of the poorer economic prospects. At the beginning of the year, it was primarily the hope that monetary policy would normalize that made banks the best sector in the Stoxx Europe 600 stock market index. No industry is doing worse now.

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In addition to the economic risks, there are also operational risks at Deutsche Bank. The money house employs around 1,500 IT staff in Moscow and St. Petersburg. “It’s just one of several technology hubs around the world; a failure therefore does not represent a significant risk for global business operations,” emphasizes the bank. Other technology centers, for example in Asia, could take over the development capacities of the Russian location.

The crisis only hit banks with large Russian subsidiaries like the French Société Générale and the Italian Unicredit, whose share prices collapsed by more than 40 percent, even harder than the Frankfurt crisis. The Austrian Raiffeisenbank International (RBI) is considered to be the institution with the greatest risk from Russia because around 40 percent of its profits come from Russia and Ukraine. The RBI’s price losses have totaled 57 percent over the past four weeks.

All three institutes have meanwhile calculated how a total loss of their commitment to Russia through possible expropriation by the Putin regime would affect it. Both Société Générale and Unicredit have pledged that the capital loss will not affect their dividend payments or share buyback plans. RBI has announced that it will withhold the dividend for 2021 for the time being.

New goals after the renovation

Investors also expect concrete plans for dividends and share buybacks from Deutsche Bank on Thursday, which will then present its new goals for the coming years. In mid-2019, CEO Sewing had prescribed a tough restructuring plan for the money house, which will cost up to 18,000 jobs. By the end of 2022, Sewing had promised an eight percent return on tangible equity. He also wants to reduce the cost-to-income ratio to 70 percent.

At the upcoming investor day, the CEO not only has to answer the question of whether the Ukraine war calls into question the guidelines, but also what goals the bank is setting itself for the coming years. This strategic planning is also likely to have thrown the dramatic worsening of the geopolitical situation into chaos.

It should be clear that the new return target will be above the eight percent mark. On the other hand, it is unlikely that the bank will go as far as the prominent analyst Stuart Graham would have liked, who had brought twelve percent as a target return into play.

Before the Ukraine crisis, many European banks had raised their profit and payout targets significantly, most notably Unicredit and France’s BNP. That has also increased the pressure on Deutsche Bank, whose stock continues to trade well below book value.

So far, Sewing has not commented on how – and how quickly – he intends to fulfill the promise made in 2019 to return a total of five billion euros to shareholders. the Bank has so far only announced that for the past fiscal year 20 cents Dividend per share and intends to buy back shares worth 300 million euros in the first half of the year.

More: “Times are getting much worse” – Europe’s banks fear expropriations in Russia

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