A total of 71.5 billion euros ($99.3 billion) was set aside in
2013 by the 20 biggest listed banks involved in the exercise, a
Reuters analysis of their new annual reports shows. Many also
boosted capital ratios by raising cash and hoarding profits.
If replicated across the 128 lenders subject to tests the European
Central Bank aims to complete by October, it could mean no bank will
fail or be forced to raise large amounts of new capital. Such
limited consequences helped discredit previous tests by EU financial
watchdog the European Banking Authority (EBA) — one reason the ECB
is keen to show that its new exercise will truly be tough on the
While some analysts have suggested that a failure by the ECB to
force the closure of any euro zone bank after its own tests could
again undermine the credibility of the exercise, many see it as more
important that the ECB's scrutiny creates a stronger banking system — something the data suggest is happening.
"A lot of action has been taken," said Carla Antunes da Silva, head
of European banks research at Credit Suisse. "I don't think you need
to have a day of reckoning where a big bank needs to fail.
"A few years ago, if you had asked investors what they wanted to see
from stress tests they would have said 'bodies' -but not any more,"
A survey last month of 200 clients of her own bank had, she said,
found very few seeing it as essential to the credibility of the ECB
stress tests that a major bank should fail.
ECB President Mario Draghi himself has highlighted progress already
made since they learned of his plans and said this month he was
"pretty confident" that the testing regime would "find a stronger
banking system than we had before announcing it".
The EBA, which will coordinate this year's stress tests with the
ECB, said investors were interested not just in whether banks pass
or fail but their sensitivity to stress and how supervisors deal
with the results.
"The credibility of the EU-wide stress test rests on transparency;
market participants will determine for themselves how supervisors
and banks are dealing with remaining pockets of vulnerability."
Back in January, analysts at Keefe, Bruyette & Woods published a
report showing 27 of the ECB's 128 banks failing a simulated stress
test, though of these only Commerzbank was among the top 20 listed
entities. The German lender has said it is "well prepared" for the
One senior official at a banking regulatory body in Europe told
Reuters that he and his peers would not be concerned if the ECB
review failed to force significant remedial action at major banks.
However, several experts, speaking privately, emphasized that it
could throw up surprises and problems.
One person who has been involved in bank tests before said large
provisions already taken by banks do not mean they are out of the
woods. One indicator of that was the ratio to equity of bad loans
against which provisions have yet to be made.
Reuters analysis shows non-performing loans not covered by
provisions make up about a third of the equity across the 20 banks.
In the cases of three banks, however, bad debts not provided for
exceeded their total equity. If those banks' collateral were to
prove worthless and no repayments were made on the loans, those
banks' equity would be entirely wiped out.
That would be an extreme outcome, however.
Nonetheless, such issues highlight uncertainties in the process.
Karl Whelan of University College Dublin, who advises the European
parliament's economics committee, said: "There's no doubt that banks
have been building up their capital ratios.
"But these ratios often hide a lot."
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The core tier 1 ratio, a key measure of financial strength, rose to
an average of 11.85 percent at end-December across the 20 banks
whose accounts Reuters analyzed — up from an average 10.77 percent a
year earlier. Using a slightly different tool, the ECB requires
banks have a ratio of at least 8 percent.
The 20 banks account for
about 60 percent of the risk-weighted assets held by the 128 banks,
and range in size from Spain's Santander down to those like Bank of
Ireland and Italy's Mediobanca. The group does not include large
banks that do not have listed shares.
The ratios that banks themselves disclosed for 2013 were nudged
higher as the 20 raised more than 16 billion euros in equity and
booked post-tax profits. Excluding a huge 14-billion euro loss
announced by UniCredit of Italy, triggered by provisions ahead of
the ECB tests, the other 19 posted a total profit of 20 billion
euros. Since the turn of the year, the banks have continued to sell
assets and raise capital.
The main wild card in the ECB's tests, and their main enhancement
over the EBA's previous efforts, is an assessment of whether banks
have recognized all their impaired loans and set aside enough to
cover losses. If the ECB concludes the loans are overvalued, this
will push capital ratios down.
The 20 banks examined classed 9.1 percent of their loans as
non-performing at the end of 2013, against a non-performing ratio
just below 8 percent a year ago.
The 71.5 billion euros the 20 set aside to deal with loan losses
last year was down 20 percent on provisions they took in 2012, when
business was tougher. Collectively, they have now taken enough
provisions to cover losing 55 percent of their bad loans.
However, much remains obscure in the detail of how banks state their
non-performing loans, or NPLs: "It's ... very hard to assess
provisioning data, given the differences across countries and banks
in their approaches to classifying and accounting for NPLs," said
Karl Whelan in Dublin.
Those uncertainties notwithstanding, investors have piled back into
the equity and debt of banks with the highest NPL ratios, with
Italian and Spanish banks leading share price gains among European
banks and National Bank of Greece making its return to the bond
"This hunt for yield has made people say 'we really do think the
worst is behind us'," said Edmund Shing, a London-based portfolio
manager with BCS Asset Management, noting a new willingness to buy
relatively risky assets.
Ian Robinson, head of credit at asset manager F&C, said: "Most
people are comfortable that Europe's household banks have taken the
primary steps necessary to clean their balance sheet by writing down
NPLs and raising capital.
"But the smaller banks may prove a bigger problem."
($1 = 0.7201 euros)
(Additional reporting by Aimee Donnellan in London;
editing by Alastair Macdonald and Will Waterman)
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