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EU Banks: ESG Red Flags - Heightened Operational Risks Due to Invasion of Ukraine

In this commentary, DBRS Morningstar looks at the social and governance risk subfactors that could become more important in DBRS Morningstar’s ESG credit assessment of European banks if not managed appropriately.

Key highlights include:

• Since the invasion of Ukraine, European banks need to ensure that they are blocking and identifying any potential illicit payments from sanctioned individuals and/or businesses. If not managed appropriately, the governance subfactors ‘Bribery, Corruption and Political Risks’ and ‘Corporate Governance’ in the DBRS Morningstar ESG Framework could have an impact on our credit analysis over time.

• In addition, there has been a heightened risk level of cyberattacks targeted towards European banks and corporates. As a result, the social subfactor ‘Data Privacy and Security Risk’ could also increasingly have an impact on our analysis.

• The social subfactor ‘Community Relations’ could come under attention. How a bank engages with Russia could have implications on its reputation, however, we also consider it remains unlikely to impact the credit ratings assigned to banks in our rating universe.

“European banks are facing higher legal, operational, and reputational risks. For instance, any non-compliance with the sanctions imposed could lead to fines and reputational consequences, although this would probably materialise over a longer timeframe. In addition, the war has also triggered heightened cybersecurity risks, with the ECB telling European banks to strengthen their cyber defence” said Vitaline Yeterian, Senior Vice President from the DBRS Morningstar Global Financial Institutions team.