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Economy

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Currencies

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Banks, Financial

RBS emerges as biggest failure in tough UK bank stress tests

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Banks

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Categorized | Economy, Equities

European banks feel backlash of clean-up


Posted on July 31, 2014

A picture taken on April 14, 2012 in Paris, shows the entrance of a BNP Paribas bank. AFP PHOTO LOIC VENANCE (Photo credit should read LOIC VENANCE/AFP/Getty Images)©AFP

Investors in European banks received a harsh reminder of the risks posed by tougher regulation and closer scrutiny of financial balance sheets on Thursday as two big lenders announced record losses despite an improving economic outlook.

Shares in Banco Espírito Santo fell 40 per cent after Portugal’s central bank ordered the country’s biggest lender to raise fresh capital and said former board members could face legal consequences for “harmful management”.

In France, BNP Paribas reported a record €4.32bn loss in the second quarter, stung by the effect of the almost $9bn in fines the French bank paid in May for violating US sanctions in Sudan, Iran and Cuba.

    The news comes as the European Central Bank carries out its comprehensive assessment process – cleaning up lenders’ balance sheets before the launch of Europe’s banking union later this year.

    “People have moved to underweight over the summer in the bank sector,” said James Chappell, analyst at Berenberg. “I don’t think people will come back to the sector until we are through the ECB’s comprehensive assessment process.”

    When a handful of big European financial institutions, including Santander, the eurozone’s largest bank, reported first-half results on Thursday, the broad economic rebound boosted underlying earnings, as provisions for bad loans fell and net interest margins rose.

    But at BNP and several other groups, problems related to misbehaviour and regulation overshadowed the generally positive picture.

    In the UK, Lloyds Banking Group reported an almost 60 per cent drop in statutory pre-tax profits for the first half of the year after setting aside a further £600m for claims of payment protection insurance mis-selling, taking its total provision for the issue above £10bn.

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    Austria’s Erste Group slumped to a €1.03bn net loss in the second quarter, as it wrote down its Romanian business and set aside money to comply with a Hungarian law forcing banks to compensate borrowers for foreign-currency loans.

    By far the biggest surprises have come from Portugal’s BES, which launched a €1bn capital increase in June to prepare for the ECB’s stress tests and asset quality review. Its prospectus revealed the serious difficulties facing the Espírito Santo family group, the bank’s biggest shareholder with 25 per cent.

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    “These hidden losses in bank balance sheets continue to get uncovered, as people are unable to support those debts,” Mr Chappell said.

    BES is struggling to avert a government rescue by hurriedly patching together a private-sector capital increase after the Portuguese lender posted a first-half net loss of €3.58bn. That halved its common equity tier one capital ratio – a vital measure of a bank’s strength – to 5 per cent, below the regulatory minimum of 7 per cent.

    “These banks have been through a lot of economic stress and have big balance sheets, which is exactly why the ECB’s stress test and asset quality review are trying to establish a clean slate across the sector,” said Daragh Quinn, analyst at Nomura.

    Analysts said BES could struggle to persuade investors to contribute to a second capital increase in only a few months.

    Despite purchasing shares at a discount of almost 40 per cent, investors who participated in BES’s €1.04bn capital increase in June have already seen the value of their stock fall more than 75 per cent.