But the sector's long-term attractiveness has been damaged by
revelations of extra non-performing loans and hidden losses that
will dent future profits.
The ECB said on Sunday the region's 130 most important lenders were
just 25 billion euros ($31.69 billion dollar) short of capital at
the end of last year, based on an assessment of how accurately they
had valued their assets and whether they could withstand another
three years of crisis.
The amount of new money needed falls to less than 7 billion euros
after factoring in developments in 2014, well shy of the 50 billion
euros of extra cash investors surveyed by Goldman Sachs in August
were expecting. That means existing investors will only be asked for
a fraction of the demand they expected in order to maintain their
But, those who read the details of the ECB's proclamation on the
health of the euro zone banking sector would have seen more ominous
signs too, as the ECB pointed to the amount of work that remains to
be done to restore the region's lenders.
The review said an extra 136 billion euros of loans should be
classed as non-performing - increasing the tally of non-performing
loans by 18 percent - and that an extra 47.5 billion euros of losses
should be taken to reflect assets' true value.
"Banks face a significant challenge as the sector remains
chronically unprofitable and must address their 879 billion euros
exposure to non-performing loans as this will tie-up significant
amounts of capital," accountancy firm KPMG noted.
Others took a bleaker view. "One-fifth of European banks are at risk
of insolvency," said Jan Dehn, head of research at Ashmore,
referencing the fact that one-fifth of banks fell shy of the ECB's
pass mark at the end of last year.
He added that the ECB's efforts to boost the euro zone's sluggish
growth through pumping money into the economy would not work if
banks were too poorly capitalized to lend.
After the ECB adjusted banks' capital ratios to reflect supervisors'
assessments of banks' asset values, 31 had core capital below the 10
percent mark viewed by investors as a safety threshold, while a
further 28 had ratios just 1 percentage point above.
"(The results were) positive for equity, fundamentally disappointing
on credit due to limited capital raising," Societe Generale
strategist Kit Juckes noted.
Banks need to lend more to boost their earnings, since they profit
from the difference between the ultra-low rate they can borrow money
at and the higher rate they charge to customers. Lending can also
boost economic growth, which helps banks.
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Analysts from Citi remarked that the scale of the asset quality
review adjustments "matter in terms of future potential regulatory
constraints". Banks with big hits to capital ratios as a result of
the ECB's adjustments will have less capacity to expand, lend more,
or pay dividends.
Others found a silver lining in the bad news delivered by the ECB.
"We were positively surprised at the severity of the asset quality
review, the scale of the additional non-performing loans for
example," said Roberto Henriques European credit analyst at JPMorgan.
"That additional information showed that they are going to be much
Several also welcomed the fact that investors at least now had
transparent figures they could rely on. "This should ease any
concerns about more skeletons the banks' closets," said Geir Lode,
head of Hermes Global Equities. "(It's) positive for the markets."
That extra information gives investors some protection if the ECB's
relatively modest capital demand proves not to be the final word in
how much the banks really need. "Everyone will be looking hard to
decide whether the ... is too little to shore up the banks that are
at risk," said Salman Ahmed, global fixed income strategist at
Lombard Odier Investment Managers.
"The good news is that the review process is fully transparent.
Investors have been handed plenty of data on the banks' assets and
are now in a position to judge for themselves."
(Reporting By Laura Noonan; Additional reporting by Nishant Kumar
and Carolyn Cohn in London and Carmel Crimmins in Dublin. editing by
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