Italian Banks Not Worst for a Change, European Stress Test Shows
By Ross Larsen
November 2, 2018 9:43 PM EET
Italy’s biggest bank stocks may be under pressure, sliding over their exposure to slumping government debt, but they fared better than many of their peers in Europe’s strictest stress test ever.
The country’s largest lenders, Intesa Sanpaolo SpA and UniCredit SpA, finished in the middle of the pack, seeing their highest-quality capital ratios shrink to 9.66 percent and 9.34 percent respectively. Those results surpassed Societe Generale SA and Banco Santander SA, among others. The worst Italian performer, Banco BPM SpA, narrowly beat Britain’s Barclays Plc, which took last place.
Italian banks were closely watched in the European Banking Authority stress tests amid concerns that they are overexposed to the country’s sovereign debt and vulnerable to slowing economic growth. There are concerns that the sharp rise in yields on Italian bonds will hurt their capital levels going forward.
The results won’t surprise Intesa Chief Executive Officer Carlo Messina, who had maintained the test wouldn’t reveal any bad news for the lender. He described Intesa as “a clear winner of this exercise” after the results were released.
BPM said the results don’t reflect the “de-risking” actions it has taken this year, as well as some of the benefits of the merger that created the lender. UBI Banca SpA, whose key capital ratio dropped to 7.46 percent, said the test doesn’t take into account its recent reduction in non-performing loans and its “strong containment of operating costs.”
Italy’s average reduction in CET1 ratios under the test puts it just below the average and ahead of Spain, Sweden and Belgium. In the previous test released in 2016, Italy’s Banca Monte dei Paschi di Siena was the worst-performing bank in Europe. It wasn’t included in the last test after being rescued by the state.
Though the country’s slumping bonds may post capital risks in the long term, lenders face few immediate dangers, according to investors and analysts. Some said the government’s public spat with European authorities is a major factor hurting the stocks.
The EBA’s examination is based on banks’ 2017 figures, so they don’t reflect this year’s erosion of bond values, which started in May. Italian bank shares have been pummeled since bond yields began to rise, and took a fresh hit as the country’s leaders battled with EU authorities over Italy’s spending plans for next year.
How Europe's Biggest Banks Fared in Toughest Stress Test
November 2, 2018 9:33 PM EET Updated on November 2, 2018 10:18 PM EET
European regulators have conducted their toughest test of how resilient banks are to shocks like Italy’s bond slump and economic fallout from Brexit.
The test showed banks would see the aggregate key measure of financial health fall by almost 4 percentage points to 10.1 percent in the scenarios for a severe economic downturn, according to the European Banking Authority. While there’s no pass or fail grade, the outcome of the stress test is important because it helps determine whether banks need more capital or if they can instead increase shareholder dividends and staff bonuses.
Read a QuickTake on Stress Tests
Here are charts to help measure the performance of individual banks among the EBA’s sample of 48 lenders.
Biggest Banks
Barclays ranked lowest among Europe's biggest banks in this year's stress test
Source: European Banking Authority
Barclays Plc had the lowest common equity Tier 1 ratio in the test among Europe’s 10 biggest banks by assets. Over the test’s three-year horizon, 25 banks would have faced regulatory restrictions and decreased payouts by 52 billion euros ($59 billion).
Read more: Barclays Posts Lowest Capital Ratio in Latest EU Stress Test
Hardest Hit
Well-capitalized public sector lenders saw the biggest drop in CET1 ratios
Source: European Banking Authority
Note: Average reflects 48 banks tested
A German development bank and a sustainability lender from the Netherlands with sizable capital cushions recorded the biggest drop in their CET1 ratios. Several commercial lenders from the U.K. and Germany were close behind.
Leverage Under Stress
Six European banks' leverage ratios fell under required minimums in stress test
Source: European Banking Authority, Financial Stability Board
Note: Minimum requirements calculated based on new Basel standard that adds a leverage buffer equal to half of the firm's risk-based capital surcharge for being systemically important.
Under a capital measure that ignores the riskiness of assets, Deutsche Bank fared worst, falling 1.39 percentage points below a new minimum that’s based on the largest lenders’ systemic importance. European financial firms detest the leverage ratio requirement – which had been used in the U.S. for several decades before becoming global after the 2008 crisis – arguing it overstates their low-risk exposures such as mortgages.
Best Performers
Scandinavian banks dominate the ranks of the strongest commercial banks
Source: European Banking Authority
Note: Average reflects 48 banks tested
Scandinavian banks, which have long had some of the highest capital ratios in Europe, made up the largest share of lenders that maintained the best levels of financial strength.
Worst Performers
Three investment banks were among the lenders with the lowest capital ratios
Source: European Banking Authority
Note: Average reflects 48 banks tested
Barclays also had the lowest capital level of the wider group of banks. It was in good company with other firms heavily exposed to investment banking: Deutsche Bank AG and Societe Generale SA were also among the banks at the bottom of the scale.
Still, stress tests are becoming a more routine affair. In Europe, regulators stopped delivering pass or fail grades with their last exam in 2016, which was criticized at the time for its limited scope. In 2014, 25 out of 130 banks failed in the largest-ever exercise, which aimed to restore confidence and end a two-year slump in lending that had choked off Europe’s economic recovery.
Less Stress
Stress tests have become a routine part of banking supervision since the crisis
Source: European regulatory authorities
Note: There were no tests published in 2012, 2013, 2015 or 2017
— With assistance by Yalman Onaran
(Adds chart on leverage ratios below fifth paragraph.)
