By Valentina Za

MILAN, Reuters – Italy’s 2nd-largest bank UniCredit announced that a write-off would be required for its Russian operations, which includes cross-border exposure. This will result in its capital distribution plans being stranded.

UniCredit is Europe’s most vulnerable bank to Russia. It stated that it will still be able pay cash dividends in 2021, even in extreme situations where it has zero exposure.

This would reduce by two percentage points a key capital ratio that stood at 15.03% at year’s end. It could be lowered to slightly above 13%.

UniCredit announced that it would continue to purchase its shares up to 2.58 Billion euros if the key indicator of financial strength is maintained at above 13%.

UniCredit explained that although we may not view this scenario as our baseline case, UniCredit is taking a responsible and sustainable approach when it comes to our distributions.

UniCredit indicated that it would give quarterly updates regarding the maximum 200-basis point impact and, if it was lower than its worst-case scenario, it would purchase back the shares at an equal amount.

Benjie CreelanSandford, a Jefferies analyst said that the buyback or at least part thereof could be delayed until there is more clarity about Russian-related losses.

UniCredit share prices had reached a record high of 15.85 Euros per share, almost four years ago, thanks to Orcel’s promise to pay. That was just before tensions with Ukraine increased.

On Tuesday, the stock was up by 6% to 9.017 euro. It had lost over 40% since last month’s highs.

Analysts had warned Russian exposure cast a shadow over Orcel’s payout plans, which in turn are a key element in the former UBS banker’s M&A strategy.

According to sources, Orcel planned to offer Banco BPM a takeover deal in order to profit from the rise of stock prices, before Russia invaded Ukraine.

UniCredit stated that its Russian client’s cross-border exposure was 4.5 billion Euros, net of 1 billion euro guarantees by non-Russian state-export agencies.

About 30% of exposure goes to oil companies, with less than 5 percent of total exposure being to sanction-hit counterparties.

UniCredit Bank Russia was its 14th-largest lender and the local arm. It had 9.4 billion euros in risk-weighted assets at 2021’s end.

According to it, “Net forex exchange hedges are reduced our direct exposure UniCredit Bank Russia to approximately 1.9 million euros.”

UniCredit may also suffer a loss of up to one billion euros due to Russian bank derivatives exposure. ($1 = 0.9173 euros)