‘Crisis-torn Italian bank Monte dei Paschi di Siena fared worst in the stress tests.
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The solution should also allow Rome to avoid having to inject public cash to recapitalise the bank, which under European Union rules would entail politically unpalatable losses for Monte dei Paschi’s bondholders and depositors above 100,000 euros.
Investors will have a close eye on how Italy’s struggling banks fare, as well as Deutsche Bank, which.
The newspaper said the EBA results published on Friday would reveal the bank’s continued fragility while the four other Italian banks being studied would apparently come out well – even though the country’s financial system is creaking under the weight of a total of 360 billion euros in bad loans.
The EU-wide stress tests showed that most of the 51 European banks that were scrutinized were strong enough to withstand a sharp drop in the economy and markets. Beyond Monte dei Paschi, Ireland’s Allied Irish Bank and Austria’s Raiffeisen proved to be the weakest financially. The issue is important because rescuing failed banks has overwhelmed the public finances of some eurozone states before, leading to bailouts, such as Ireland’s.
The CEO of Monte dei Paschi, Fabrizio Viola, said that the bank would assess in the coming months whether the need for the capital increase would be less than the 5 billion euros now fixed. He has promised a new strategic plan by the end of the year. Under the adverse economic scenario this would fall to 9.4% by the end of 2018. Viola said he expected the deal would free management to be “more focused on the business, when they were very focused on managing the big legacy we had in the financial and credit portfolio”.
“We think this transaction can give an upside to shareholders”, he said.
Other Italian banks including UniCredit were among the top performers in the sector, while Deutsche Bank rose 2.6 percent after its Chief Risk Officer said the tests had shown there was no reason for a capital hike at the German bank.
According to the European Banking Authority, the hypothetical stress scenario translated into a detrimental impact of 380 bps (3.8 percentage points) on the CET1 ratio.
BMPS, the world’s oldest lender, would see a 14.23% plunge in its core capital ratio – a key measure of financial stability. A CET1 score below 2 percent is considered critically undercapitalized and 4.5 percent is the regulatory minimum.
The EBA said the scenario remained valid following Britain’s vote last month to leave the European Union since its tests were with worse growth figures that the worst-case Brexit scenario.
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Following a series of scandals, difficulties for its investment bank in a low interest rate environment and the impact of a tough restructuring plan – investors are wary about the banking giant. They’re useful in showing that banks such as Barclays, Lloyds and RBS are making progress towards building improved and more resilient balance sheets.
