The Russian gas crisis exposes German and Italian banks

Touched but not sunk. Restrictions on gas supplies could increase the risks to the solvency of European banks, but the latter have the reins strong enough to cope with this crisis, Moody’s judges in a note published on Wednesday 17 August.

The rating agency has identified six economies heavily exposed to Russian gas: Germany, Austria, Hungary, the Czech Republic, Slovakia and Italy. In an adverse scenario characterized by a total cut of Russian gas, the banking systems of these countries would first suffer from an increase in bad loans, he estimates, the problems of the supply chains, being able to then act as a transmission belt to other economies on the continent.

Greater capacity to absorb losses

Affected European banks have, however, increased their loss-absorbing capacity since 2019, the agency notes. The level of their risky loans has generally been reduced compared to the pre-pandemic level: this is particularly true in Italy where at the end of 2021 they represented less than 4% of the stock of loans compared to 7.5% before the Covid crisis. -19. “The sales plans for non-performing loans of Italian banks have not been completed “, However, notes the financial rating agency, this new crisis that is developing them “Even more relevant”. Furthermore, European banks have increased their reserves to meet credit risk during the pandemic and have not yet used them up. Commerzbank and Deutsche Bank have just made additional provisions in the second quarter to cover the scenario of a Russian gas crisis.

Despite not returning to pre-Covid levels, the profitability of European banks remains high enough to support their ability to absorb losses, according to Moody’s. Furthermore, the ratio of German banks’ net profit to their tangible assets went from 0.1% to 0.3% between 2019 and 2021, their profitability being supported in particular by a low cost of risk.

The consequences of the war in Ukraine, of course, will disrupt this dynamic. However, the increase in the cost of risk in 2022 and 2023 will be offset in the short term by the increase in revenues driven by the rise in rates, Moody’s estimates.

The agency is decidedly optimistic, favoring the scenario of a weak recovery in 2022 followed by sluggish growth in the first half of 2023, a macroeconomic universe in which bank safety cushions would allow them “to absorb potential pressures on their solvency”. In the event of deterioration, the ECB’s anti-fragmentation instrument would act as “An additional safety net”adds Moody’s, mainly for the benefit of Italian and southern European banks.

However, the agency warns of another risk, of a political nature: after the exceptional efforts made during the pandemic, the ability of governments to support the economy is now limited. There is therefore a great temptation to resort to private solidarity: this is the case of Spain, where the government has approved an exceptional tax on the banking sector, but also of Hungary. The Czech Republic is considering a similar measure.

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