Italy's second-biggest bank UniCredit said a full write-off of its Russian business, including cross-border exposure, would cost around €7.4 billion, leaving its capital distribution plans hanging by a thread.
UniCredit is one of Europe's banks most exposed to Russia.
It said it would still be able to pay proposed cash dividends for 2021 even in an extreme scenario where it zeroed its exposure.
That would shave two percentage points off a key capital ratio, which stood at 15.03% at the end of last year - lowering it to just above 13%.
Provided this key measure of financial strength stays above 13%, UniCredit said it remained committed to buying back its own shares for up to €2.58 billion under the strategy new CEO Andrea Orcel announced in December.
"Whilst we do not consider this extreme scenario as our base case, we are taking a prudent and sustainable approach to our distributions," UniCredit said.
UniCredit said it would provide quarterly updates on the up to 200 basis point impact, and if the ultimate capital hit was smaller than its worst-case scenario it would use up to an equivalent amount for the share buyback.
"The buyback (or at least part of it) could now be delayed pending clarity on eventual Russian-related losses," Jefferies analyst Benjie Creelan-Sandford said.
Orcel's payout pledge had lifted UniCredit shares to a near four-year high of €15.85 a share last month, before tensions over Ukraine mounted.
The stock closed up 6% at €9.017 yesterday, having lost more than 40% from 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.
Before Russia invaded Ukraine, Orcel had been poised to launch a takeover offer for smaller rival Banco BPM in an all-share deal that aimed to capitalise on the stock price recovery, sources have told Reuters.
UniCredit said its Russian client cross-border exposure stood at €4.5 billion, net of guarantees of around €1 billion by non-Russian state export agencies.
Around 30% of the exposure is to oil and gas companies with sanction-hit counterparties accounting for less than 5% of the total.
UniCredit Bank Russia, its local arm and Russia's 14th largest lender, had risk-weighted assets of €9.4 billion at the end of 2021.
"Net of forex exchange hedges, our direct exposure to UniCredit Bank Russia is reduced to around €1.9 billion," it said.
UniCredit could also potentially suffer an up to €1 billion loss due to its derivatives exposure to Russian banks under the extreme scenario.