European Banks Stress Tests: Delight in Details, Headlines Underwhelm

- Headlines vs. Details – "CEBS Stress Tests were announced 23 July. The headlines – number of weak banks (7 out of 91), capital deficit (€3.5 billion), definition of capital (Tier 1 not equity Tier 1), stress of the trading book only for government bonds – are underwhelming. But positives are in the details: CEBS provided a lot of data, in a systematic way, including on banks' sovereign exposures. And aggregate credit loss assumptions and pre-provision profits look sensible."
- Winners & Losers – "Looking at the change in Tier 1 capital ratios between the reported 2009 and the 2011 stressed result, the best performing big banks are from the UK, Spain and the Nordic region. Barclays leads the large caps, with Santander and BBVA high up in the table. Nordea, Intesa, Lloyds and BNP Paribas round out the large caps in the top quartile. If we use absolute stressed Tier 1 levels, the UK and Nordic banks again feature at the top of the table. And French are best of the Euro area."
- Stressing Sovereign Risks – "One obvious omission in the CEBS test is that it explicitly only considers sovereign shocks in the trading book. But the data on sovereign exposure provided by CEBS allows us to carry out our own stress test: capital deficit increases to €15 billion at 24 banks. If we were to use a 6% equity Tier 1 ratio (which is harsher that the US tests’ 6% T1 and 4% equity T1) the capital deficit rises to €63 billion. Note that six of the 91 banks did not give us their sovereign exposures, all from Germany, including Deutsche Bank."
- Sensible Assumptions on Credit, PPP – "While the macro-economic assumptions do not appear to be too tough, the credit loss assumptions do seem sensible. A stressed loss assumption of about double our 2010-11 base case forecast and more in-line with the c4ppt GDP drop in 2009 than the less than c1ppt cumulative drop assumed for 2010-11 stressed. And the aggregate CEBS stressed loss number is almost identical to our early June stress test of a dozen Euro banks. Similarly, CEBS' aggregate stressed pre-provision profit for these dozen banks is almost identical to our modelling."
- Rallying Into The Release – "Euro Area bank stocks are up c25% from their early June lows, while bank credit, as measured by iTraxx indices, have recovered about two-thirds of their sell-off during 2Q10. The positive recent momentum may be reinforced by the CEBS Stress Test release, especially due to the positives on information and transformation. We would look to Euro area stocks which have been laggards ytd and score well in the CEBS test, such as SocGen, Intesa and BBVA (all down c25% despite the recent bounce). Others are up more sharply recently, such as the Greeks, mid-cap Spanish and Santander, where we would
worry more about travelling and arriving."
Citigroup European Banks Stress Tests 20100726