The European Banking Authority published eagerly awaited results of its 2016 stress tests on Friday evening and to the surprise of many observers, Italian banks were far from bottom of the pack.
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Included within the report was a brief summary, in chart form, of how the 51 banks tested by the EBA fared in terms of their capital ratios. Under the latest test scenario, some €269 billion would be wiped off the capital bases of the banks. However, both banks’ CET1 ratios have improved since previous year.
Of the other big United Kingdom banks reviewed in the tests, Barclays PLC’s (LON:BARC) capital ratios would fall by less than RBS – four percentage points – but would be left with a lower capital ratio buffer of 7.3%.
“This stress test is a vital tool to assist supervisors in accelerating the process of fix of banks’ balance sheets, which is so important for restoring lending to households and businesses”, he added. Spain’s Banco Popular, Bank of Ireland and Austria’s Raiffeisen all ended the test listed below this level at 6.62 percent, 6.15 percent, and 6.12 percent, respectively.
With Italy’s Monte dei Paschi (BMPS.MI) seen as the only bank having to raise large amounts of capital, analysts say the stress test results will at least not put further downward pressure on book values in general.
Rating agency Moody’s described the performance of Dutch, Spanish, and German banks as satisfactory and said United Kingdom banks’ results were varied, partly reflecting commercial property exposures. But the bank’s chief financial officer Ewen Stevenson said they showed “continued progress”.
The Deutsche Bank AG credit strategist says negative bond yields – a scourge for lenders and investors alike – appear to have been overlooked.
Barclays’ CET1 ratio fell to 7.3% under the 2018 stressed scenario, on a fully loaded basis.
The detailed stress-test results are not meant primarily to serve as a guide for banking-sector investors.
In an adverse scenario, earnings and capital adequacy will be burdened, for example, by lower net interest income caused by higher funding costs as well as higher impairment losses, bringing OP Financial Group’s CET1 ratio down to 14.9%, which would still be above the minimum capital adequacy requirements.
“The stress test results confirm the necessity for UniCredit to reinforce its capital position”, Banca Akros analyst Luigi Tramontana said in a note.
Founded in 1472, Monte dei Paschi is one of the world’s oldest banks, but in recent years has been one of Europe’s weakest, with €50bn of bad loans. Italy has joined Greece, Cyprus and Portugal as countries whose banks have worryingly high proportions of non-performing loans.
Like Monte dei Paschi, Allied Irish Banks was also below the 5.5 per cent level at 4.31 per cent, but said it has undergone fundamental restructuring and is now sustainably profitable.
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The 2016 EU-wide stress test was conducted by the EBA in cooperation with the MNB, the ECB, the European Commission and the European Systemic Risk Board (ESRB).
