Factbox: What analysts say on Europe bank stress tests

(BestGrowthStock) – In a bid to reassure financial markets, Europe’s banking watchdogs are conducting stress tests to assess the resilience of their banks to economic shocks and market risks.

Here are selected comments from analysts:


“These should be stringent, transparent, consistent and timely to be credible. If conducted and communicated properly this could be positive for the market.

“This is the key question: will the stress tests include haircuts on sovereign debt holdings on banks’ balance sheets? The issue here is that it would be difficult for the EU to include the restructuring of a European sovereign debt in the stress testing, as it would be paramount to saying that this is a feasible scenario.

“We believe that the market is especially looking to have some stress testing of sovereign risk and that not including it may defeat the whole purpose of the stress tests, since sovereign risk is what the market is most stressed about.

“Given the politics involved in stress testing sovereign risk, an alternative in our view would be to force banks to disclose their holdings of sovereign debt country by country, so investors and analysts can do their own stress-testing.”


It conducted a stress test on the largest European banks, reducing 2009 income by 25 percent and doubling loan loss provisions.

“While the results vary, most banks can absorb this level of stress with a significant but not dramatic hit to capital ratios — on average, their Tier 1 ratio would decline by around 2 percentage points, reversing the improvement seen over the past year.

“The conclusion is that our stressed scenario would entirely reverse the 200 bps improvement that we have seen in average capital ratios over the past year, bringing the Megabank (amalgamated data) Tier 1 ratio back down from 10.6 percent at end-2009 to 8.5 percent, and Core Tier 1 from 8.6 percent to 6.5 percent.”

“For most individual banks, the hit to Tier 1 ratios is somewhere close to a range between 100 and 300 bps.


“We believe the results of the stress-tests for the banks under our coverage should produce no major surprises; the institutions we cover have recapitalized and their risks are under constant scrutiny by the markets.

“Credit buffers for the major banks are significant (BBVA and Santander have the largest buffers), and in general, we view these banks as resilient.

“For unlisted, public sector institutions, the regulators’ ability to credibly size cumulative residual losses could go a long way toward restoring confidence in (and among) the banks.

NOMURA (June 21):

“Assuming banks are able to absorb losses in a period of up to three years, we believe most of the large European banks would be able to fund losses from operating earnings.

“However, the timing of such losses is central. The faster the losses have to be realized, the greater the likelihood that the system would need to strengthen its capital position.

“If the stress scenarios are not painful enough, do not acknowledge the default risk from some European countries or if the transparency of the assumptions used is poor, publishing the stress test could be counterproductive and raise more questions about solvency.

CITI (June 21):

Conducted its own stress test on 12 euro zone banks.

“Under our base case, the hit to 2012E tangible common equity for the 12 banks amounts to 17 percent while under the bear case the hit is 23 percent. The equity tier 1 ratio declines from an expected 9 percent at end-2012 to a stressed level of 7.8 percent (base) and 7.1 percent (bear).

“Banks that screen poorly on our stress test include the likes of National Bank of Greece and Commerzbank, as well as Credit Agricole and Dexia.”


Conducted its own test on a severe double-dip recession and a separate test on sovereign bond exposure.

“In neither case is the stress unbearable … (For the double-dip scenario) the aggregate impact is 8 percent of TNAV and 0.7 percentage points of Core Tier 1.

“The outcome of the sovereign debt haircut scenario is also rather marginal, at an aggregate 0.6 percentage points of Core Tier 1.

(Compiled by Steve Slater; Editing by David Holmes)

Factbox: What analysts say on Europe bank stress tests