Potential Stoppage of Russian Gas to Europe - Ongoing Impact from Russia’s Invasion of Ukraine on European Banks

The commentary analyses the ongoing impact on European banks from the economic effects of Russia’s invasion of Ukraine & a potential stoppage of Russian gas.

Summary highlights:

• The International Monetary Fund (IMF) has significantly revised down Euro Area (EA) countries’ GDP growth forecasts, in aggregate by 1.5 percentage points to 2.8% for 2022 compared with six months ago.

• So far, the expected macroeconomic impact is manageable for European banks. However, DBRS Morningstar considers that European banks will likely generate lower profits and may end up revisiting their dividend and share-buyback distribution plans, as a result of the expected worsening in the macroeconomic environment.

• In the case of a stoppage of Russian gas, a full substitution of other supply sources would not be possible in a short period of time. In such a situation, the impact on the EA’s GDP could be significant. In such a situation, DBRS Morningstar considers that European banks’ capital plans would face significant revisions and banks would have much more limited capacity to distribute dividends. Moreover, some banks with tight capital cushions might need to dip into their capital buffers.

“There is high uncertainty regarding the economic effects of the conflict in Ukraine. A possible stoppage of Russian gas supply would likely lead to rationing and even higher inflation, which would significantly cloud the Euro Area growth outlook”, said Carlo Capuano, Vice President Sovereign Ratings. “In the event of a suspension of the Russian gas supply, we expect that net capital generation will be negative for European banks in 2022. This will translate into significant revisions of the banks’ capital plans to distribute dividends and share buybacks. Moreover, some banks with tight capital cushions might need to dip into their capital buffers”, said Pablo Manzano, from DBRS Morningstar’s Global Financial Institutions team.