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UniCredit Warns Of Losses Of Up To $8 Billion In Russia, To Be Cautious On Buybacks

UniCredit Warns Of Losses Of Up To $8 Billion In Russia, To Be Cautious On Buybacks
UniCredit, Italy's second-largest bank, said a full write-off of its Russian operations, including cross-border risk, would cost roughly 7.4 billion euros ($8.1 billion), putting its capital distribution plans in jeopardy.
UniCredit, one of Europe's most exposed banks to Russia, said it would be able to pay projected cash dividends for 2021 even if it completely eliminated its exposure to Russia.
This would reduce a critical capital ratio by two percentage points, from 15.03 per cent at the end of last year to a little over 13 per cent.
UniCredit said it continued to be determined to buy back its own shares for up to 2.58 billion euros if this crucial indicator of financial health remained above 13 per cent, as declared by new CEO Andrea Orcel in December.
"Whilst we do not consider this extreme scenario as our base case, we are taking a prudent and sustainable approach to our distributions," UniCredit said.
The European bank, with its high exposure to Russia, will offer quarterly updates on the effect of up to 200 basis points, UniCredit said, and it would spend up to an equal amount for share buybacks if the eventual capital hit was less than the worst-case scenario that it is expecting.
"The buyback (or at least part of it) could now be delayed pending clarity on eventual Russian-related losses," Jefferies analyst Benjie Creelan-Sandford said.
Last month, prior to the commencement of tensions globally over Ukraine's invasion by Russia and the escalation of the war, Orcel's dividend guarantee pushed UniCredit shares to an almost four-year high of 15.85 euros per share.
The stock rose 6 per cent to 9.017 euros as of Tuesday, after losing more than 40 per cent  of its value since the high that was reached by it last month. 
Analysts had warned that Orcel's payout plans, which are a crucial component of the former UBS banker's M&A strategy, would be harmed by Russian exposure.
Orcel was preparing to launch a buyout approach for smaller competitor Banco BPM in an all-share transaction before Russia invaded Ukraine, according to Reuters sources.
UniCredit stated its cross-border exposure to Russian clients was 4.5 billion euros, net of 1 billion euros in guarantees from non-Russian state export agencies.
Oil and gas corporations account for over 30 per cent of the exposure, with sanctioned counterparties accounting for less than 5 per cent of the total.
At the end of 2021, UniCredit Bank Russia, the company's local affiliate and Russia's 14th largest lender had risk-weighted assets of 9.4 billion euros.
"Net of forex exchange hedges, our direct exposure to UniCredit Bank Russia is reduced to around 1.9 billion euros," it said.
In the worst-case scenario, UniCredit might lose up to 1 billion euros as a result of its derivatives exposure to Russian banks.

Christopher J. Mitchell

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