Euroclear Net Profit Increases by 63% to €1bn
The number of sanctions and countersanctions that have been introduced since February 2022 are unprecedented and continue to have a significant impact on the daily operations of Euroclear. While new sanctions were issued at a declining pace in 2023, these still resulted in more breakage of straight-through process and increased manual interventions.
Well-established processes are in place which allow the group to implement the sanctions, while maintaining the normal course of business. However, one consequence of the sanctions is that blocked coupon payments and redemptions owed to sanctioned entities results in an accumulation of cash on Euroclear Bank’s balance sheet. At the end of 2023, Euroclear Bank’s balance sheet had increased by EUR 38 billion year-on-year to a total of EUR 162 billion.
Euroclear’s priority has been to manage the sanctions according to the spirit and letter of the law. As per Euroclear’s standard procedures, Euroclear does not remunerate cash balances and such cash balances are re-invested to minimise risk and capital requirements. Prudent management of such risks is a requirement under Euroclear’s Risk Appetite and Policies and expected by the EU Capital Requirements Regulation. The interest received on the reinvestment of cash balances is net interest income earned by Euroclear.
In 2023, interest arising on cash balances from Russia-sanctioned assets was approx. EUR 4.4 billion. Such interest earnings are driven by two factors: (i) the prevailing interest rates and (ii) the amount of cash balances that Euroclear is required to invest. Subject to Belgian corporate tax, these earnings will generate EUR 1,085 million tax revenue for the Belgian State in 2023. As such, future earnings will be influenced by the evolving interest rate environment and the size of cash balances as the sanctions evolve.
Since considerable uncertainties persist, Euroclear considers it necessary to separate the estimated sanction-related earnings from the underlying financial results when assessing the company’s performance and resources.
Euroclear is faced with a high level of complexity in managing both the wide-ranging package of sanctions and a set of countermeasures, which Russia has implemented to try to mitigate the impact of the sanctions. Euroclear allocates considerable time, resources and capital to manage market issues, potential risks and implications of these countermeasures, while maintaining regular dialogue with clients and other stakeholders.
Overall, Euroclear incurred additional direct costs from the management of Russian sanctions of EUR 62 million in 2023, with considerable senior management and Board focus on the topic. Additionally, the international sanctions and Russian countermeasures have resulted in a loss of activities from sanctioned clients and Russian securities, which negatively impacted business income by EUR 24 million.
2023 also saw various parties contest the consequences of the application of sanctions, with a significant number of legal proceedings ongoing, almost exclusively in Russian courts. Claimants have initiated legal proceeding aiming mainly to access the assets blocked in Euroclear’s books. Despite all legal actions taken by Euroclear and the considerable resources mobilised, the probability of unfavourable rulings in Russian courts is high since Russia does not recognise the international sanctions. Euroclear will continue to defend itself against all legal claims.
In parallel, the Board notes that the European Commission is contemplating various options to use the profits generated by the reinvestment of sanctioned amounts held by financial institutions, including Euroclear, for the financing of Ukraine’s reconstruction.
Euroclear is focused on minimising potential legal and operational risks that may arise for itself and its clients from the implementation of any proposals from the European Commission. The company continues to act in a transparent manner with all authorities involved and to retain profits related to the international sanctions applicable on Russian assets until further guidance is provided on the distribution or management of such profits.
Euroclear continues to monitor and assess the potential impact of post balance sheet events on its 2023 financial statements.
