* Stress test was a sideshow The main event was the recapitalisation and rescue of
Monte (MPS), announced mere minutes before the publication of the EBA/ECB stress
test. One bank performed quite miserably, Monte (MPS) of course, and the other 50
banks performed fine (to varying degrees). With a Monte rescue in place, the stress test
itself is something of an afterthought. No major accidents. No major surprises.
* All about Monte On average, the adverse scenario burnt through 340bps of CT1, taking
the average bank down from 12.6% core tier 1 to 9.2% at end 2018e. There was no pass/
fail mark to this test, but still Monte managed to ‘fail’ spectacularly. The adverse scenario
burnt through >14.5% of CT1, taking the 2018e CT1 ratio down to -2.2%. A
recapitalisation plan was announced shortly before the stress test results release. MPS
will receive €5bn of underwritten capital, and will also dispose of the entire stock of
€27.3bn NPLs. No bail in. No bail out. A complex transaction, and one that carries
execution risk. We don’t think the market can accept this as a done deal. See our full
report on MPS.
* 50 shades of grey The other 50 banks in the test all performed acceptably. There are
unlikely to be any major market concerns. At the stressed end of the list, four banks drop
below 7% full CT1 in the adverse scenario: Allied Irish Bank, Bank of Ireland, Raiffeisen
Holding (restructuring plan already in place) and Popular (capital increase just completed).
Of the larger systemic banks, Barclays edges below the guideline 7.5% hurdle (ie 5.5% +
2.0% buffer), but in any case is not affected by the SREP. Other systemically important
banks clear their hurdles. Deutsche Bank’s leverage ratio drops below 3% in the adverse
scenario. As this is their relevant constraint on capital, that could cause some concern.
Interestingly, no AT1 bond would have triggered loss or conversion.
* What next? Simply, we watch and wait on Monte. There is very little anywhere in the
stress test results for the market to get excited about. There are some minor concerns for
a handful of banks (Deutsche Bank, Raiffeisen, Barclays in particular). Some banks also
perform very well (Nordics, ISP, KBC, Lloyds). However, nothing that should change
views in either direction. It should be no surprise that Deutsche Bank found the leverage
ratio a challenge, or that Nordic banks are well capitalised. Instead, the market will focus
on the execution risks around MPS and the credibility of the solution on the table. The
ongoing question of execution risk around MPS reinforces our preference for ‘safe core’
in both equity (BNPP, DNB, Erste, Lloyds, ING) and credit (Lloyds, Credit Arigole, UBS)