For those poring over the results of the EU’s bank stress tests on Friday night, there was a strong sense of déjà vu.
Italy, the problem country in the 2014 tests, once again topped the dishonours list, this time because of the standout failure of Monte dei Paschi, which announced a €5bn rescue plan immediately before the test results came out.
Ireland’s battled-hardened banks found themselves in the line of fire again, much to the chagrin of Irish bankers.
German banks, which have been forced to defend their capital adequacy time and again, accounted for four of the ten banks deemed the worst affected by another crisis.
And two of the UK’s biggest banks, Barclays and Royal Bank of Scotland, languished near the bottom of the rankings for capital strength.
For investors, though, the real question is whether Europe’s banking black spots persist, or whether they have all improved so much that even today’s weakest are now safe.
● 2016 state (from 2014 stress test): Transitional CET1 ratio of 6.14 per cent v 8.42 per cent average
● 2018 state (from 2016 stress test): Fully loaded CET1 ratio of 7.62 per cent v 9.2 per cent average
Monte dei Paschi was the only bank to suffer losses exceeding its entire capital base under the ‘adverse’ scenario in the test. It was judged to have a negative common equity tier one ratio, of -2.44 per cent, at the end of 2018, on a fully loaded basis — the measure of stress that analysts are most interested in.
Not that other Italian banks were a beacon of high capitalisation. UniCredit’s end point capital ratio of 7.10 per cent was the sixth worst of the 51 banks that the EBA tested, while UBI Banca’s 8.85 per cent and Banco Popolare’s 9.0 per cent were below the system-wide average of 9.2 per cent. Only Intesa Sanpaolo beat the average, with a CET1 ratio of 10.21 per cent.
Still, Italy feels hard-done by. “Stress tests have attracted an enormous attention (especially in Italy), which is not fully justified,” wrote Lorenzo Codogno, an economist in Milan who used to work for the Italian treasury. “There is still an outsized media and financial market attention on pass/fail outcomes.”
Carmelo Barbagallo, the Bank of Italy’s head of supervision was also quick to spring to his institutions’ defence. “Italian banks have shown, on the whole, good resilience, even assuming very adverse economic and financial conditions,” he told the Financial Times.
● 2016 state: Transitional CET1 ratio of 9.12 per cent v 8.42 per cent average
● 2018 state: Fully loaded CET1 ratio of 9.44 per cent v 9.2 per cent average
Germany’s Deutsche Bank had been a cause for concern among some investors heading into the stress tests, but it fared better than domestic rival Commerzbank and European rival Barclays.
In a statement on Friday night, Deutsche pointed out that its stressed CET1 ratio was also higher than the bank’s result in the 2014 stress test (as was the case for 44 of the 51 banks tested). In Deutsche’s case, this feat was more impressive because a new risk factor, on conduct/litigation, wiped 220 basis points off its CET1 ratio.
However, Commerzbank and three smaller German banks featured on the list of the ten banks with the worst capital deterioration over a three-year period. Deutsche came in at number 12.
Still, Gunter Dunkel, head of the Association of German Public Sector Banks, said that the tests showed “that the German banks are clearly stress resistant”. Stuart Lewis, Deutsche Bank’s chief risk officer, told the Frankfurter Allgemeine Sonntagzeitung newspaper that concern for the bank was “unfounded”. and there was no prospect of a capital raise.
● 2016 state: Transitional CET1 ratio of 7.63 per cent v 8.42 per cent average
● 2018 state: Fully loaded CET1 ratio of 8.51 per cent v 9.2 per cent average
Royal Bank of Scotland was the biggest UK loser in the stress tests, losing 745 basis points from its CET1 capital ratio under the adverse scenario, the third worst drop among the banks tested.
Ewen Stevenson, RBS finance director, claimed that the results showed the bank’s “continued progress towards transforming the balance sheet to being safe and sustainable”. But analysts had a different take. Bernstein’s Chirantan Barua said: “For RBS, this puts to bed any dividend hopes for the bank till at least the end of next year.”
Mr Barua also described Barclays’ capital position as “precarious” in light of the results, which found the bank had the seventh weakest capital ratio based on future regulations, and the fifth weakest capital ratio based on current rules. Barclays pointed out that the stress test “does not take into account subsequent or future business strategies and management actions”.
● 2016 state: Transitional CET1 ratio of 7.05 per cent v 8.42 per cent average
● 2018 state: Fully loaded CET1 ratio of 5.21 per cent v 9.2 per cent average
Six years after their landmark bailout, Allied Irish Banks and Bank of Ireland are under pressure again. AIB had the second worst stress test result of the EU banks, with its CET1 ratio falling to 4.3 per cent if measured under future rules. That’s below the 5.5 per cent minimum supervisors typically set, complicating the Irish government’s hopes of selling the bank over the coming years.
Bank of Ireland lost 513 bps of its fully loaded CET1 ratio, leaving it with a ratio of 6.15 per cent.
Bankers in Dublin describe the tests as unfair, and say they penalise Irish banks for new regulatory treatments that do not come into force until 2022, relating to state support.
They also point out that AIB has repaid €3.5bn of state capital since December, something the bank would not have been allowed to do if its capitalisation was unsound. And they say both will benefit from a recovering Irish economy.
Marcus Evans, a partner at KPMG’s Frankfurt office, said the stress tests’ methodology did penalise banks which had suffered big losses in the past. “Benchmarks (for losses) are derived from historical time series and if a crisis is included in that time series, there is an impact,” he said.
Matteo Renzi, Italy’s prime minister, led Italian officials in proclaiming the bank stress tests a success for the country, despite the catastrophic failure of Monte dei Paschi di Siena, writes Rachel Sanderson.
After six months in which shares in Italian banks have more than halved on concerns about Italy’s €360bn of problematic loans, the satisfactory outcome for the other four of Italy’s five lenders under examination was taken as opportunity to celebrate.
Mr Renzi, whose handling of the banking crisis is expected to have political consequences for a constitutional referendum due in the autumn, said in an interview with newspaper La Repubblica that retail investors in Italy’s banks had nothing to fear.
A senior official at the Bank of Italy told the Financial Times that markets should focus on Monte dei Paschi di Siena’s restructuring plan and not on the bank’s catastrophic failure of the EU stress tests.
It had the worst result of all 51 banks tested by the EBA. MPS’s capital deterioration in the stress scenario, of 1,451 basis points, was more than four times worse than the 340 basis points average.
“What matters most, is that the bank could be, according to the plan, in a condition to restore its profitability and therefore increase the financial support to the Italian economy,” said Bank of Italy’s head of supervision Carmelo Barbagallo.
He also rejected suggestions that the failure of Monte dei Paschi, which also emerged the worst loser from the 2014 stress tests, suggested a failure of supervision on the part of the Italian bank supervisor.
Monte dei Paschi’s rescue plan includes a €5bn recapitalisation, conditionally backed by a group of investment banks, as well as the securitisation of €50bn of gross non-performing loans.
Shares in MPS rose more than 6 per cent on Friday as the embattled bank neared a solution to the chronic woes which have already triggered two bailouts and €8bn of capital raising.
Lorenzo Codogno, founder and chief economist of LC Macro Advisors, said the deal for Monte Paschi was “a step in the right direction” but not yet a “turning point” for Italy’s banking system given the extent of the bad loans piled throughout the country’s banks.