Stress Test: Worst fears avoided; capital divergence widens
Test headlines have scope to reassure …
Ahead of the test, concerns centered on 3 main topics: Italian banks, German banks, risk of bail-in. Overall, the test identified BMPS as the weakest European bank, and highlighted the need for further capital build in G-SIB institutions (notably Barclays, Deutsche, SocGen); neither is surprising to us. Importantly, however, the test shows Italian banks (ex BMPS) in a reasonable position, at odds with market perception of systemic weakness.
Applying GS hurdles: G-SIBs do poorly
EBA’s test does not apply an explicit pass/fail hurdle – its key output is therefore a stressed capital ratio. To identify banks with the strongest capital positions, we apply progressively demanding hurdle rates – calibrated at standard supervisory levels, market levels and finally at levels that allow for capital return – to EBA’s test results. Banks that perform poorly are: (1) wholesale G-SIB banks (Barclays, Deutsche, SocGen), (2) Irish banks and (3) BMPS. Nordic banks and EM operators do best. In all, 35 (of the 51 banks tested) clear all six of our hurdles.
Credit quality overlay: Texas ratios elevated
The Texas ratio remains elevated for many. EBA’s data allows for an update: among the 35 banks that clear all of our hurdles, eight banks (JYSK, BAPO, OTP, UBI, ISP, POP, SABE and NORD LB) have a Texas ratio >2x the sector mean. Their capital flexibility will depend on their ability to reduce NPLs at market rates.
Italy: Ex BMPS, a solid test
EBA’s test included five Italian banks and showed BMPS in a position of weakness. Other Italian banks fared better. Consider: when GS hurdles are applied, Italian banks screen solidly, with the exception of UCI (near pass on “supervisory” hurdles; falls short on hurdles calibrated at market levels).That said, Texas ratios are elevated for all.
Reassured with our CL stocks
Three of our CL banks (KBC, Erste, Santander) clear all GS hurdles. BNP falls marginally short of the “capital flexibility” hurdle. All in, the test reassures us regarding banks rated CL-Buy.