Are unstressed European banks worth the money?

By Ben Berkowitz

AMSTERDAM (BestGrowthStock) – Most of Europe’s biggest banks comfortably passed last week’s stress tests, and shares throughout the sector showed relief on Monday, but having underperformed all year, are they now good value for money?

Up to Friday’s close, European bank shares were down 4.7 percent for the year, against a decline of just 0.1 percent for the broader market. On Monday bank shares rose slightly and the cost of insuring their debts against default fell a couple of notches.

The consensus seems to be that the relatively mild end to the stress tests is good news for the sector. However, plenty of uncertainty remains over banks that either squeaked by with just enough capital or passed but did not fully disclose the data that went into their calculations.

These are some of the arguments for and against buying into European banking shares:


Morgan Stanley, in a comprehensive review of the stress test results, said it was time to be overweight on banks with upside from improvement in credit markets and excessively large discounts baked in on sovereign debt fears — fears it said should be allayed by the level of disclosure last week.

Among the names it highlighted were BNP Paribas, Societe Generale and Barclays.

Other analysts agreed that the level of disclosure on sovereign holdings in the stress test should cheer investors and add to the buying case on certain names.

“In our opinion, the important catalyst here is not so much the stress tests themselves as the transparency provided, which is impressive,” Credit Suisse said in a note, recommending BNP Paribas, as well as Santander and Unicredit.

Goldman Sachs called the test a “substantial step forward” and said even in its own more rigorous scenarios, including one with a restructuring of Greek debt, exposures were much more manageable than it anticipated.

Others concurred that the sector was ready to move on.

“We’ve already recapitalized most of the European banks anyway with huge amounts of money,” said Ian Henderson, who runs a global financials fund for JP Morgan. “Let’s get on with life.


But the contrarian case on the sector holds that the stress tests were too lax, with the phrase “missed opportunity” popping up repeatedly in the context of raising more capital.

Dutch asset manager Fred Huibers of Het Haags Effektenkantoor said there were concerns about the level of data provided by some German and Italian banks compared to the institutions in other countries.

“The German and Italian banks, both their level of disclosure and the assumptions used by the German and Italian authorities, big question marks,” Huibers said in an interview. “In our opinion you stay away from them, or you go short.”

J.P. Morgan, in a sharply worded analysis, said the tests left concerns open about bank solvency and liquidity. The firm said it was unlikely the sector could move above a valuation around 1.0 times 2011 estimated tangible book value.

It highlighted risks around Spain in particular, given ongoing questions about its economic fundamentals, and with the stress tests supporting the firm’s case that visibility is limited for a return to normal valuations.

“Until then, and with dependence on government actions at critically high levels, we cannot build up a positive case around Spain,” it said in a note.

Credit analysts at ING criticized the testing as not rigorous enough, particularly in its use of a tier 1 capital ratio of 6 percent instead of 8 percent, which ING said was likely to be the rule under the “Basel III” guidelines.

“As to individual credit considerations, we call for caution on all institutions which came out of the test with an estimated Tier 1 ratio below 8 percent,” ING said – some 39 of the 91 tested banks in total, including 22 in Spain.

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(Reporting by Ben Berkowitz; Editing by Mike Nesbit and Sitaraman Shankar)

Are unstressed European banks worth the money?