The sale of ING Bank (Eurasia) to local company Global Development JSC underwent due diligence but remains subject to regulatory approval. Closure is expected in the third quarter. Meanwhile, Goldman Sachs has secured approval from Russian authorities to sell its subsidiary to the Armenian investment fund Balchug Capital.

The moves by ING and Goldman Sachs contrast with developments at Raiffeisen Bank International (RBI), which failed in its efforts to reduce its Russian exposure via an asset swap. RBI continues to have to allocate provisions against the exposures of its Russian subsidiary. While it has the earnings capacity to absorb the impacts, this underscores potential risks for foreign banks still present in Russia.

Intesa Sanpaolo (A/ Stable) secured the necessary approvals to divest its Russian subsidiary in 2023, but the transaction has been delayed due to bureaucratic hurdles in Russia.

Constructive step for ING

We view ING’s deconsolidation and reduction plans as a constructive step to lower reputational, legal, and financial risks arising from being present in Russia. The impact on profitability and capital will be manageable while successful completion of the transaction will allow management to focus on growth in key target regions.

ING anticipates that the transaction will lead to a negative post-tax P&L impact of approximately EUR 700m and a 5bp reduction in its CET1 ratio. As of September 2024, ING’s CET1 ratio stood at 14.3%, comfortably above regulatory capital requirements. At the same time, the group plans to optimise its capital position with further capital distributions, targeting a fully-loaded CET1 ratio of approximately 12.5% by 2025. This would leave ING with a buffer of about 160bp above its fully-loaded CET1 requirement of 10.9%, although it would position the group at the lower end of the range compared to its peers.

The reduction in reputational and legal risks outweighs the modest 5bp negative impact from deconsolidating Russia. ING’s resilient profit generation will support capital adequacy in coming years. The group’s Russian unit contributed less than 2% of net profits in 2023, so withdrawal from the country will have a negligible effect on ING’s overall performance.

ING stopped doing new business with Russian companies two years ago. It scaled back its operations, separated the subsidiary from its network and reduced total Russian lending exposure by more than 75% to EUR 1bn as of September 2024, with approximately half covered by Export Credit Agency and Credit Policy and Risk Insurance. ING has committed to further reducing its offshore exposure to Russian clients.

RBI provisioned for litigation risk

RBI holds the largest exposure of European banks to Russia, with loans amounting to EUR 4.2bn at the end of 2024, approximately 4% of the group's portfolio. In line with its reduction plan, loans and customer deposits in Russia decreased year-on-year in 2024 by 30% and by 35% respectively.

The Austrian group has been the most profitable European bank in Russia in the past three years. However, it suffered a 50% decline in consolidated profits partly because of a EUR 840m provision booked through its Russian subsidiary in the fourth quarter of 2024 related to a Russian court ruling that could hold its subsidiary liable for damages of approximately EUR 2.04bn in a case brought by Rasperia Trading.

In 2024, RBI attempted to acquire Rasperia's stake in the Austrian construction company Strabag through its Russian subsidiary, aiming to recover frozen dividends. However, the deal was cancelled due to concerns over potential sanctions. RBI’s EUR 840m provision for its Russian subsidiary was estimated at EUR 2.04bn, net of any potential proceeds from legal action against Rasperia in Austria.

This provision, along with the EUR 824m negative impact from the sale of RBI’s Belarusian subsidiary in December and EUR 649m provisions against CHF and EUR mortgages in Poland, significantly impacted RBI's consolidated profit in 2024. Despite this considerable setback, the group's strong earnings capacity enabled it to absorb these negative effects.

Even if RBI had fully divested its Russian subsidiary, the group would have maintained a CET1 ratio of 15.1% as of YE 2024, comfortably meeting regulatory capital requirements. By YE 2025, RBI aims to sustain its CET1 ratio at approximately 15.2% excluding Russia.

While losing the Russian subsidiary, one of its most profitable franchises, will impact earnings, the group is confident of achieving a return on equity of around 10% in 2025, even without this unit's contribution (FY 2024: 7.4%, excluding Russia and Belarus). Given RBI's resilient business model and strong market positions in Austria and Central and Eastern Europe, we view this target as realistic.

RBI's case underscores the risk that Russian court rulings related to transactions that cannot be completed due to international sanctions can subject European banks to substantial provisions and financial pressure.

See also: European banks in Russia: exceptional factors drive profits amid pressure to exit, August 2024

Scope has subscription ratings on ING Bank N.V. and Raiffeisen Bank International. These are available on ScopeOne, Scope’s institutional investor platform.