JPMorgan has cut its earnings estimates for European banks by 14-15% a year in the wake of Russia’s invasion of Ukraine.
The banks now find themselves in a lower growth environment which might crimp their ability to dish out the dividends and buy back shares.
The Russian banking market is “relatively small” at just US$1,600bn in assets compared to the EU banking sector’s US$40,000bn, JPMorgan (JPM) noted.
European banks’ overall direct Russian exposure accounts for an estimated US$8bn of equity/intra-group debt as well as US$210bn in Russia-related bank, corporate and central bank exposure, JPM calculates.
“The majority of forecast risk, therefore, comes via the spillover effect in respect to capital at risk from: i) commodity traders, but we think this is generally manageable; and ii) most importantly, the economic spillover effect on Europe”, the investment bank said.
Even after scaling back its share buyback and dividend forecasts, JPM thinks the risk/reward balance on European banks is positive following the recent share price resets.
“We see it unlikely the ECB [European Central Bank] will take a blanket approach on payouts for Eurozone banks under its supervision,” JPM said, expressing a preference for UBS, Deutsche Bank, Lloyds Banking Group PLC (LSE:LLOY), AIBG, Sabadell and Nordea in the sector.