What did the 2016 stress test really tell us? We believe the progress made on ‘fixing’ MPS has more relevance for the Italian banks than their performance in the stress test. The lack of a system-wide solution to the NPL problem was expected, but means that the stability of Italian banks likely remains brittle. Elsewhere, Deutsche Bank’s performance in the stress test was somewhat weak, but arguably better than feared. The Benelux arguably saw the biggest negative surprises in terms of the reductions to CET1 ratios – potentially putting pressure on dividend expectations.
Focus on Italy: With Atlante buying MPS’ NPLs at 33c, this implies a CET1 erosion for Italian banks of 70-150bps, with UniCredit most notably below the SREP requirement. However, the MPS ‘fix’ may be difficult to roll-out across the sector. The system still looks vulnerable should credit quality deteriorate.
Deutsche Bank in limbo: With an equity valuation of 0.3x TBV 2016e, Deutsche Bank was clearly in focus for the stress test. But frustratingly little clarity has been added here. The 7.8% CET1 ratio in the adverse scenario is better than the last stress test – but only marginally above the ECB’s threshold (5.5% + 2% G-SIB = 7.5%). Similarly, a 3.0% leverage ratio in the adverse scenario is likely to be viewed as only just ok.
Negative surprises for Benelux: The end-point CET1 ratios all look acceptable here, but the magnitude of declines in the CET1 ratios is likely to raise some eyebrows (ABN – 5.9%, ING –3.7%, KBC – 3.6%). The knock to the safe-haven Benelux banks is surprising, even if partly explained by the EBA’s rates/GDP scenario being harsher there.