European bank stress tests were too soft, analysts say
LONDON’S stockmarket will give its verdict on the European Union’s bank stress tests today after analysts warned they were not tough enough to give investors real confidence.
Only seven of the 91 institutions investigated failed to meet the capital requirements demanded by the Committee of European Banking Supervisors under three “economic shock” scenarios. Five Spanish banks – Banca Civica, Diada, Espiga, Unnim and Cajasur – plus Germany’s Hypo Real Estate and Greece’s ATEbank will have to raise €3.5bn (£2.9bn) to improve their capital buffers.
The results were milder than experts had expected. Analysts at Macquarie, the Australian group, predicted 12 banks would flunk the tests. Analysts at Goldman Sachs were expecting a much larger capital raising of €38bn after the examinations.
US markets, which were still trading when the stress test results were published on Friday evening, showed little reaction. The euro was steady.
Daniel Gros, head of the Centre for European Policy Studies, described the exercise as a wasted opportunity “to really clean up the banking sector”. He said: “The stress tests declared the corpses as dead. We know a bit more now about where the shaky candidates are, but the tests didn’t bring any real insights.”
Jon Peace at Nomura said the low number of banks failing raised the question of whether the EU’s tests had been “sufficiently severe”.
Several banks came close to missing the regulator’s demand of a six per cent tier one capital ratio under the most extreme scenario of a macro-economic downturn with sovereign debt problems. Italy’s Monte dei Paschi has 6.2 per cent, Allied Irish Banks has 6.5 per cent and Germany’s Postbank has 6.6 per cent.
The UK’s top four lenders, Barclays, HSBC, Lloyds Banking Group and Royal Bank of Scotland, sailed through the stress tests. Barclays’ tier one ratio even improved from 13 per cent at the end of 2009 to a projected 13.7 per cent by the end of 2011 under the EU’s harshest simulation. HSBC’s fell 60 basis points to 10.2 per cent, Lloyds’ dropped 40 basis points to 9.2 per cent and RBS’ fell 3.2 percentage points to 11.2 per cent.
Barclays: Diversified blue chip emerges stronger from shocks
BARCLAYS comes out of the European stress tests as the strongest of Britain’s four largest lenders, with its tier one capital ratio actually rising.
Under the regulator’s benchmark scenario, which models a mild economic cooling, Barclays’ tier one ratio bobs up from 13 per cent to 15.8 per cent. Under the median scenario it gains 90 basis points to 13.9 per cent, while under the “armaggedon” scenario – which envisages a £740m write-down to Barclays’ banking book after sovereign turbulence and a £473m loss on its bonds portfolio – it rises 70 basis points to 13.7 per cent.
In all cases, the strengthening of the bank’s tier one ratio is a result of Barclays’ expected revenues and earnings from around the world.
In a statement on Friday, a spokesperson for the institution said: “Barclays regularly conducts its own internal stress testing… based on adverse macro-economic shocks and adverse conditions in financial markets, including government bond markets. Barclays has also been subject to annual external stress tests across all its books by the FSA since 2009. In each stress test, whether internal or external, Barclays has demonstrated its capital position and resources are sufficient to meet its regulatory capital requirements.”
HSBC: Far Eastern-angled bank takes biggest hit to trading book
HSBC, the FTSE 100 lender whose chief executive works from Hong Kong, would suffer more than Britain’s other top banks in the case of an economic slump.
HSBC would endure a £3.7bn write-down to its trading book in the case of severe sovereign debt difficulties, the stress test results showed, plus a £780m mark-down on its banking book. But even then its core tier one capital ratio would stand at 10.2 per cent, 60 basis points below its level at the end of 2009 and 1.5 per cent below its level in the regulator’s baseline scenario.
HSBC released its sovereign debt positions, which partially explained the projected write-downs.
Just under eight per cent of the bank’s sovereign book, $9.8bn (£6.4bn) is held in expsoure to periphery Eurozone countries. HSBC is particularly exposed to Italy at $6.3bn and Greece at $1.9bn.
In a statement, boss Michael Geoghegan said: “We are pleased to note the Financial Services Authority’s conclusions on this exercise and view it as a timely and important contribution to building investor and market confidence and supporting financial stability. The outcome for HSBC reinforces what we have been saying – HSBC is both financially strong and well positioned to deal with any further foreseeable economic downturn.”
Lloyds Banking Group: State-backed behemoth easily survives
LLOYDS Banking Group’s capital position is expected to improve under the European board’s benchmark scenario.
The bank, still 43 per cent owned by the taxpayer, is projected to increase its tier one capital ratio from 9.6 per cent at the end of 2009 to 10.8 per cent in normal conditions. Under the most extreme termors modelled by the European Union, it will take a £1.4bn hit to its banking book and lose a further £23m on sovereign exposure, bringing its tier one ratio to 9.2 per cent.
Lloyds was at pains to point out the tests did not take into account its contingent capital or its ongoing efforts to shrink its balance sheet.
The bank also released a breakdown of its sovereign exposures at the end of June. Lloyds has no exposure to the “PIIGS” countries of Portugal, Ireland, Italy, Greece and Spain, with the majority of its book – £5.3bn of £7.7bn – in UK bonds.
A spokesperson stated: “We welcome the positive steps being taken by CEBS to assess the overall resilience of the EU banking sector and to provide comfort on banks’ ability to absorb further possible credit and market shocks. Lloyds Banking Group has a robust capital position that reflects the significant capital raising undertaken in 2009.”
More detail on Lloyds’ recovery will come at its interims in August.
Royal Bank of Scotland: Sir Fred’s former empire stabilises
ROYAL Bank of Scotland has made significant progress since the government rescued the empire built by Sir Fred Goodwin from collapse.
The Scottish bank would have to write down £1bn from its banking book and £1.8bn from its sovereign debt portfolio under the European regulator’s meltdown scenario, but even then its core tier one capital ratio would stand at 11.2 per cent.
Goodwin’s disastrous takeover of ABN Amro left the bank staggering in the financial crisis of 2008. He resigned as chief executive that October after the government was forced to prop up the bank.
In a statement, RBS said it remained committed to restructuring itself by de-risking its balance sheet and improving its tier one capital ratio.
Finance boss Bruce Van Saun said: “We support the need for banks to maintain strong capital ratios and we believe that stress tests like these, whilst theoretical, can provide insights into absolute and relative strength. We are pleased the results demonstrate the strong capital position of RBS as we endeavour to execute our recovery plans over the coming years.”
RBS emphasised the EU’s stress tests were theoretical and did not represent a forecast by the bank as to its performance should any of the scenarios play out.
Financial Services Authority: Regulator hails preparedness and resilience of the UK’s top banks
THE Financial Services Authority (FSA) helped the Committee of European Banking Supervisors (CEBS) to apply the stress testing exercise to the UK’s largest banks.
The CEBS modelled three “trouble” scenarios for Europe. The first plotted a minor downwards deviation from the expected course of travel, using parameters such as GDP, unemployment and interest rates. The CEBS insists it was conservative in working out the resulting losses banks would suffer on loans, despite analysts’ scepticism.
The CEBS’ second stress scenario imagined a three per cent slowdown in GDP versus the European Commission’s two-year forecast. The third added in a sovereign element, simulating an increase in European Union member states’ government bond yields, a medium-term increase in household and corporate loan defaults and mark-to-market losses on banks’ sovereign exposure.
The FSA welcomed the stress tests. It said: “The CEBS exercise shows the UK banks are well-placed to handle further periods of economic stress, as outlined in the macro-economic parameters detailed by the CEBS, should such stress develop.”
The FSA continued: “The outcomes of the stresses demonstrate the preparedness and resilience of the UK banks under unlikely adverse economic scenarios… This resilience is the result of the considerable work undertaken to strengthen UK banks in recent years.”
Because the UK brought in a tougher definition of core tier one capital in 2008, the results are not exactly comparable Europe-wide.
HOW THE BIG FOUR LINE UP
BARCLAYS
Tier one ratio at the end of 2009 13%
Under severe stress 13.7%
HSBC
Tier one ratio at the end of 2009 10.8%
Under severe stress 10.2%
LLOYDS BANKING GROUP
Tier one ratio at the end of 2009 9.6%
Under severe stress 9.2%
RBS
Tier one ratio at the end of 2009 14.4%
Under severe stress 11.2%