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Western bank debt strains under weight of Russian crisis
December 17, 2014 / 2:37 PM / 3 years ago

Western bank debt strains under weight of Russian crisis

LONDON, Dec 17 (IFR) - Bonds from Western banks with high exposure to Russia have been badly hit by mounting concerns over the intensifying oil and rouble crisis.

Some have dropped as much as 14 points in the past month, with market participants singling out Raiffeisen Bank International, Societe Generale and UniCredit as the institutions most exposed to risks in the region.

The rouble has come under heavy selling pressure this week, forcing the Russian central bank to increase interest rates by a colossal 6.5% - an emergency move that did little to buttress the currency.

“The magnitude of the price movements in oil and currency markets has been very substantial and you have to wonder who has been caught on the wrong side of that trade,” said Gregory Turnbull-Schwartz, investment manager, fixed income at Kames Capital.

“It raises uncertainty, and if trying to invest you would be looking at much more of a premium.”

A 500m Tier 2 deal from RBI launched earlier this year was already bid as low as 91 in early December, but has since slumped further to less than 77, according to Tradeweb prices.

Yields on some of the riskiest bonds from Societe Generale and UniCredit have also spiked, hitting their highest levels since the deals printed earlier this year.

UniCredit’s euro Additional Tier 1 issue was trading at over 8%, well above its 6.75% reoffer level in September, and a loss in cash terms of more than five points. And Societe Generale’s euro Additional Tier 1 that priced in March at 6.75% was bid as high as 7.77%.

SG’s exposure to the Russian Federation was almost 25bn, UniCredit’s was over 18bn and RBI’s was almost 15.5bn as at the end of last year, according to the results of the European Banking Authority’s stress tests.

Ben Bennett, credit strategist at Legal & General, said the current impact on European banks’ profitability was mild, but that second order effects could be much more severe.

“With Russia in deep recession, global manufacturing confidence could take a hit, negatively impacting global growth,” he said.

“With growth already weak and interest rates already at zero, it’s hard to know what policymakers could do to counteract this. From a bank perspective, this is clearly bad news, and it would be systemic rather than confined just to banks that have direct Russian exposure.”

COMPOUNDING FACTORS

The traditional lack of liquidity in the run up to Christmas has played a part in the market moves, with investors saying that dealers are reluctant to add more risk.

“The secondary market at this time of year is very illiquid, so this is exacerbating some price moves, but there is clearly pressure on spreads,” said Dierk Brandenburg, senior credit analyst at Fidelity.

“Banks are exposed to deteriorating sentiment, and some have sizeable operations with financing needs. The biggest risk could be that they can’t refinance their operations.”

Lack of disclosure is adding to investor fears. Kames’s Turnbull-Schwartz said one area of uncertainty was banks’ Level 3 assets.

“Banks are allowed to use a black box model to assess the value of these assets and commodities prices are often cited as one of the inputs to calculate their value,” he said.

“There is a strong chance that this would have an effect. It’s very difficult to know however who’s been impacted because of the low level of disclosure.” (Reporting By Alice Gledhill, Editing by Helene Durand, Julian Baker)

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