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Barclays and Lloyds among worst performers in EU stress tests - Region’s top 48 banks have enough capital to withstand worst-case Brexit scenarios
Caroline Binham and Stephen Morris in London
Barclays and Lloyds Banking Group were among the worst performers in the EU’s banking stress tests, in a blow to the British lenders as they struggle to improve their profitability and deal with the potential fallout of Brexit. The results nevertheless found that the region’s top 48 banks had enough capital to withstand the worst-case Brexit scenarios. Barclays, Lloyds,
Italy’s Banco BPM and the German state-owned NordLB
had their loss-absorbing buffers fall to the worst levels in the doomsday scenario modelled by the European Banking Authority. This included a severe recession that would leave the bloc’s economy 8.3 per cent smaller than it otherwise would have been. “In a surprise set of results, UK banks have fared worse than their European counterparts as IFRS9, combined with high levels of unsecured debt, took its toll on capital,” said Rob Smith, Banking Partner at KPMG UK. “However, you have to consider that the UK was tested against a far more severe scenario than most other countries. In spite of the heavy losses, UK banks still withstood the incredibly tough test,” he added. Barclays, Lloyds, along with Royal Bank of Scotland, also accounted for three of the top five biggest deteriorations in the test, which gauged the hit to their key capital measure, known as the fully loaded common equity tier one (CET1) ratio.
“The UK was the most affected geography, both in terms of adverse CET1 depletion and ending CET1, driven by the severity of the scenario” for them, said Javier Garcia, a banking expert at Oliver Wyman. “
Italy impacts are surprisingly low, which is likely driven by a scenario that was not capturing recent market events.” Profitability remains the challenge for the European banking sector Mario Quagliariello, EBA While the results do not reflect well on the UK’s banking system, none of the banks dipped close to the unofficial 5.5 per cent level that analysts use as a de facto hurdle rate. The test is also based on a snapshot of balance sheets at the end of 2017 and therefore does not take into account any actions taken by the banks since then to shore up their capital. Analysts had predicted that the UK sector would be vulnerable to credit losses, and credit risk was one of the main drivers for the total €226bn that the 48 banks hypothetically had wiped off their balance sheets as a result of the scenarios. One of the common themes “is that many of the banks performing less well are weak in terms of profitability,” which means they would generate less in earnings to cover losses on loans in another crisis, said Mario Quagliariello, the senior EBA official leading the tests. “
Profitability remains the challenge for the European banking sector.” While there is no pass-fail in the EBA’s stress tests of banks’ balance sheets, the results are important because supervisors use them to calculate whether banks need to increase capital and how much they can pay out in dividends. CET1 fell 6.6 percentage points for Barclays, far more than the 4 percentage-point average, from 12.94 per cent to 6.37 per cent; the lowest of any bank. Lloyds posted a greater decline, at 6.9 percentage points, but finished with a higher CET1 than Barclays at 6.80 per cent. While RBS fell 6.3 percentage points, it finished at a respectable 9.92 per cent. The British banks have also had their balance sheets tested by the Bank of England in a parallel exercise; the results of which will be published early next month. Barclays said the test “does not take into account subsequent or future business strategies and management actions” and “is not a forecast of Barclays’ profits”. BPM had the second-lowest end point after Barclays, with a 6.67 per cent CET1. NordLB, which is weighed down with poorly performing shipping loans, also fared badly, finishing with 7.07 per cent, as anticipated. The EBA billed the 2018 stress test as its toughest yet and said that it encompasses all “macroeconomic risks that could be associated with Brexit”. They were also the first EBA tests to encompass new accounting standards known as IFRS9, which force banks to make upfront provisions for expected losses in the future. The outcome confirms that participating banks are more resilient to macroeconomic shocks than two years ago Danièle Nouy, chair of the ECB’s supervisory board.
Twenty-five banks would hypothetically have limits placed on their dividends if the EBA’s adverse scenario came to pass. These included the four largest UK banks, Deutsche Bank, Commerzbank, Santander, BBVA and a host of the continent’s other large institutions.
The results of Europe’s largest 48 banks were published on Friday by the EBA. A parallel but confidential exercise has been conducted by the European Central Bank on smaller eurozone banks. The results for the troubled Greek banking system were published in May. While many observers worried about the performance of embattled Deutsche, the bank posted a better than expected 5.76 percentage-point drop in the test from 13.9 per cent to 8.14 per cent.
Similarly, other larger Italian banks included came through without any significant concerns, with UniCredit’s CET1 falling only 3.34 percentage points to 9.34 per cent in the harshest scenario. Monte dei Paschi and Carige were not part of the EBA’s tests. The latest iteration of the test was far less dramatic than in previous years. In 2016, Monte dei Paschi posted a negative capital ratio in the test and had to raise €5bn in capital to plug the shortfall. The inaugural 2014 test resulted in the ECB ordering a multitude of banks to raise €25bn.
“The outcome confirms that participating banks are more resilient to macroeconomic shocks than two years ago,” said Danièle Nouy, chair of the ECB’s supervisory board. “Banks have built up considerably more capital, while also reducing non-performing loans, and improved their internal controls and risk governance.”