EU banks more resilient, but some do badly in stress test

Italy's Banca Monte dei Paschi di Siena is among the banks with the worst results in EBA's test.
Italy's Banca Monte dei Paschi di Siena is among the banks with the worst results in EBA's test.PHOTO: AGENCE FRANCE-PRESSE

LONDON • Banks from Italy, Ireland, Spain and Austria fared the worst in the latest European Union stress test, which the region's banking watchdog said showed there was still work to do to boost credit to the bloc's economy.

Eight years since the collapse of Lehman Brothers sparked a global banking meltdown, many of Europe's banks are still saddled with billions of euros in poorly performing loans, crimping their ability to lend and putting off investors.

"While a number of individual banks have clearly fared badly, the overall finding of the European Banking Authority (EBA) - that Europe's banks are resilient to another crisis - is heartening," said Mr Anthony Kruizinga, partner at PwC.

Italy's Banca Monte dei Paschi di Siena, Austria's Raiffeisen, Spain's Banco Popular and two of Ireland's main banks came out with the worst results in the EBA's test of 51 EU lenders.

"While we recognise the extensive capital-raising done so far, this is not a clean bill of health," EBA chairman Andrea Enria said.

Eight years since the collapse of Lehman Brothers sparked a global banking meltdown, many of Europe's banks are still saddled with billions of euros in poorly performing loans, crimping their ability to lend and putting off investors.

"There remains work to do."

Italy's largest lender, UniCredit, was also among those banks which fared badly, and it said it will work with supervisors to see if it should take further measures.

Germany's biggest banks, Deutsche Bank and Commerzbank, were also among the 12 weakest banks in the test, along with British rival Barclays.

Monte dei Paschi, Italy's third-largest lender, had been scrambling to pull together a rescue plan and win approval for it from the European Central Bank ahead of the test results.

The bank confirmed less than an hour before the results that it had finalised a plan to sell off its entire portfolio of non-performing loans and had assembled a consortium of banks to back a €5 billion (S$7.5 billion) capital increase.

The EBA looked at how banks could withstand a three-year theoretical economic shock which ended with the Italian lender, the world's oldest, having a core equity capital ratio of minus 2.44 per cent.

This was the third stress test in the EU since taxpayers had to bail out lenders in the 2007-2009 financial crisis. It involved scenarios including EU economic output at 7.1 per cent below the baseline over the next three years and a 20 per cent drop in interest income.

"Based on these results, European banks do have deeper loss-absorbing capacity than previously, but concerns clearly remain around profitability and the appetite of equity investors to invest in bank stocks," said Mr Steven Hall, a partner in KPMG.

Of the banks tested, 37 are based in the euro zone and supervised by the ECB, which said the results reflected progress in repairing balance sheets.

"The banking sector today is more resilient and can much better absorb economic shocks than two years ago," said Ms Daniele Nouy, who heads supervision at the ECB.

At the start of the test, the banks had an aggregate core ratio of 12.6 per cent, with all capital requirements factored in. This fell to 9.2 per cent by the end of the test, a drop of 340 basis points, equivalent to €226 billion of capital.

For the first time, the EU test included the impact of conduct risks such as fines and settlements.

EBA said the total hit from conduct costs was €71 billion. The largest impact was from credit or losses on loans, totalling nearly €350 billion across all the banks tested.

REUTERS

A version of this article appeared in the print edition of The Sunday Times on July 31, 2016, with the headline 'EU banks more resilient, but some do badly in stress test'. Print Edition | Subscribe