SNL Financial releases analysis on the state of Europe’s banking systems ahead of the ECB’s comprehensive assessment

Announced today, SNL Financial has released a new report exploring the state of Europe’s banking systems ahead of the release of the ECB’s comprehensive assessment.

The data and charts offer a snapshot of the assessed banks and the sovereigns involved at end-2013, the date chosen by the ECB. SNL’s particular focus has been on the nonperforming loans still within the Eurozone system — which amount to some €900 billion — and the extent to which they must hinder banks’ ability to lend and support the economy. SNL has also reviewed banks’ capital positions and profitability. There are issues everywhere; although banks have clearly strengthened their capital positions, profitability and asset quality remain real challenges.

There are few surprises. According to SNL data, the troublesome banks are mainly to be found in the periphery: Greece, Cyprus, Italy, Spain and Portugal. Credit costs at year-end 2013 took their toll here.

Ultimately, the outcome of the ECB’s assessment depends upon politics and political will. Given the sheer scale of the NPLs involved in the system, the easiest route is to insist that the significant money raised in recent years will suffice. Bank analysts with stock to recommend will tend to this view; further capital raises will further pressure returns and the banks’ already low profitability.

Quite how much capital the banks need is a matter for real dispute. In June 2014, Berenberg assessed the European banking system from the top downwards and suggested there was a €320 billion capital hole. Many other bank analysts currently suggest that little capital is required in the banks that they cover.

SNL has taken a simple measure of adequate coverage which has been reached or nearly achieved by several leading banks, including the entire banking systems of France, Austria and Ireland. Given the eurozone average of 51%, a 60% coverage ratio chosen does not look excessive; it corresponds to a bottom of cycle impairment experience as Chirantan Barua, bank analyst at Sanford Bernstein, pointed out to SNL.

A 60% coverage ratio reveals a capital need of €96 billion for the Eurozone banks at year-end 2013. Italy, followed by Greece, looks the most challenged; then follow Spain, Germany and the Netherlands.