The generally high capital and strong asset quality of banks in Germany, France, the Netherlands, Belgium and Austria should be underscored by the European Banking Authority’s 2016 stress test, yet significant weaknesses could still emerge, especially among German and Austrian lenders.
Deutsche Bank along with France’s BNP Paribas SA, Société Générale SA and Crédit Agricole SA look the weakest eurozone "core" banks among those subject to the EBA test. All four reported CET1 ratios around or below 11% as of year-end 2015; Deutsche Bank has not improved since, publishing a 10.8% figure at the end of the second quarter. The adverse scenario foresees a long-term interest rate shock, drops in equity and property prices and a contraction of EU GDP amounting to 1.2% in 2016 and 1.3% in 2017. The precise figures vary by country, but Austrian banks are facing an especially bearish scenario, with a 30.5% drop in the stock market in 2016 followed by a 25.4% fall in 2017, alongside sharply falling house prices and especially harsh stress models for Central and Eastern Europe. Exchange rate shocks from Central and Eastern Europe and Switzerland also feature, which a bank equity analyst said could hit Austrian banks in particular.
Figures from S&P Global Market Intelligence show that most core eurozone banks boast CET1 ratios of 12% and higher, giving them the strength to withstand the negative stress scenario. Their main weakness is profitability, with only KBC Group NV and ABN AMRO Group NV achieving double-digit returns on average equity in 2015.
There is a strong correlation between low returns and weak margins, the latter being largely attributable to ECB policy
Weak profitability means that the banks are less robust and more likely to incur losses when stressed. Coverage ratios for NPLs are not especially high but offer little source for concern if one assumes economic growth. That could change in a stress scenario; BNP Paribas would need more than €12 billion to raise coverage to 80% of NPLs; ING Groep NV would need nearly €10 billion and Rabobank more than €7 billion.
Next Finance , July 29
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