The latest stress testing exercise showed that the balance sheets of most European banks are in decent shape, but restoring investor confidence will take time, the major rating agencies suggest.
Of the 130 banks that were assessed in a joint stress test and asset quality review by the European Central Bank (ECB) and European Banking Authority (EBA), Moody’s Investors Service notes that 105 “were given a verdict of good health”, and 25 were deemed as being unable to meet the minimum capital requirements in the asset quality review and stress tests. Of those, 12 have already met their shortfalls; one is exempt from addressing a shortfall; and the remaining 12 require additional capital of €9.5 billion, it says.
Moody’s notes that it expects that most of these banks will be able to close their capital shortfalls by drawing on their own resources. That said, it also says that risks for investors in subordinated instruments remain high to the extent that any of these banks struggle to meet their targets.
Fitch Ratings also says that the results of the tests were broadly in line with its expectations, so it does not expect many rating actions, either positive or negative.
The ECB’s asset quality review was a “key element”, Fitch says, noting that it uncovered €136 billion of additional non-performing loans, and a €48 billion adjustment to asset values. “High levels of unreserved problem loans will remain a key risk in the region and leave some banks, particularly in weaker countries, still vulnerable,” Fitch says.
Fitch adds that the results also highlight the reliance on transitional capital provisions at some banks, which leaves these firms more exposed if the ECB accelerates transitional rules when it takes over as the single supervisor next month. “They also highlight that leverage is still a weakness for some European banks,” it says.
“The tests are an important first step towards levelling the playing field for eurozone banks, but there is still a long way to go,” Fitch concludes.
Moody’s echoes that finding. “Moody’s believes that the ECB’s declared aim of restoring confidence in Europe’s banking systems will take time and could be challenged by the still difficult character of the operating environment which faces the region’s banks,” says Carola Schuler, managing director at Moody’s.
Schuler also notes that “many banks have only passed the stress test by very thin margins and/or could be challenged in meeting requirements based on fully-phased-in capital ratios. Accordingly, many banks will be expected to do more.”
The rating agency also says that the results of the exercise will help establish a credible new supervisory mechanism in the euro area. Moody’s says that it views the results “as credit positive for euro area bank creditors, with the most notable outcomes of the exercise being the progress toward balance-sheet repair and the improved transparency of bank accounts.”