As Russia's invasion of Ukraine continues, many large banks and corporations are taking stock of their overall exposure in the country and preparing for potential losses, as war destabilizes the region and rocks the Russian economy. Being a highly global bank, Citigroup (C 0.60%) faces more exposure in the country than most U.S. banks. Earlier this year, Citigroup disclosed in a regulatory filing that it had as much as $10 billion of exposure in the country and faced as much as $4 billion in losses in a severe adverse scenario. Let's take a look at where the bank stands with its Russia exposure.
Citigroup's exposure to Russia hasn't gone away, but the bank did reduce its exposure during the first quarter of the year. Furthermore, Chief Executive Officer Jane Fraser said that the bank's plan "to sell significant portions of our local business in Russia remains." This decision was announced before Russia's invasion and is part of the bank's transformation plan, which involves selling numerous international consumer banking divisions.
Citigroup reduced its overall exposure from $9.8 billion to $7.8 billion in the first quarter. Roughly $3.7 billion of that exposure is composed of $2.3 billion in loans and roughly $1.4 billion in bonds and off-balance sheet unfunded commitments. The other $4.1 billion is from deposits and cash, reverse repo assets, and third-party cross-border exposure.
During the quarter, Citigroup also built its reserve capital for losses by $1.9 billion due to Russia, roughly $1 billion for direct exposure in the country, and then another $900 million, which Citigroup Chief Financial Officer Mark Mason said was "to account for the broader impact [of the war] on the microenvironment." Mason also said that after stress testing the bank's Russian exposure under several severe scenarios, the potential loss from Russia in a worst-case scenario is now roughly $2.5 billion to $3 billion, down from earlier projections of $4 billion.
So, overall, there has clearly been some improvement when you look at total exposure and expected losses under a severe situation, which is good. The other good thing is that when Citigroup had close to $10 billion of Russian exposure, only $1 billion of that was in deposits in cash. But of the $7.8 billion of exposure reported at the end of Q1, $2.6 billion of that was deposits and cash. Mason said that number is up as the bank worked to get other more risky assets like loans repaid, although he did say Citigroup had to put the cash in Russia's central bank due to capital restrictions in the country.
One analyst did ask why not take a bigger reserve given the severity of the situation, but Mason assured the analyst that the bank had gone through the exposure very carefully. He said the bank considered three components: direct exposure to Russian clients and entities, the "spillover" effect to industries outside of Russia, and global uncertainty from the situation.
Is Citigroup taking enough precautions?
The bank seems to have made real progress, reducing its Russian exposure fairly quickly and taking minimal losses in the process. Total exposure is down $2 billion and the breakdown of that exposure looks better with more cash and deposits and less risky assets. Furthermore, the reserve of $1.9 billion for potential losses of $2.5 billion to $3 billion in a severe situation seems fairly prudent as well. Typically, when a bank talks about a potentially severe situation, it is being pretty conservative.
One thing I am more concerned about is the bank's efforts to sell its consumer operation in Russia and how likely that is now. Citigroup may end up having to wind down this operation without a sale, which could lead to a write down, similar to how the bank exited its consumer banking operation in South Korea. I am unsure who would buy Citigroup's consumer banking operation in Russia, considering uncertainty in the country and the economic struggles Russia faces from all of the sanctions. At this point, I am probably more concerned about this aspect of Citigroup's ties to Russia than its actual exposure, but things are still fairly uncertain, and a lot can happen before everything is resolved.