- Results – "The results of the long-awaited CEBS stress test were published today. As expected, the European banking system is “sound”, with its 2011 expected Tier 1ratio declining from 11.2% under the baseline scenario to 9.2% under the most severe scenario (this includes 1.2% of government-provided capital as of 1 July 2010)."
- Failing banks – "At the 6% Tier 1 minimum, seven out of 91 banks fail the test and will require immediate recapitalization of €3.5bn under the adverse scenario: Hypo Real Estate (€1,245m), Agricultural Bank of Greece (€243m), and five cajas (€2,043m)."
- "Near Misses" - "As well as the seven banks that "failed" the Stress test, another eight banks barely scraped passed the 6% Tier 1 ratio hurdle. This group of "near misses" includes two of our quoted banks - Piraeus Bank and Monte dei Paschi di Siena. A few notches higher but still in the bottom quartile of the sample are Deutsche Postbank and Bankinter."
- Tiering – "Banks have provided detailed disclosure of their exposures to EU-27 sovereigns, on a country-by-country basis. We believe investors and analysts will welcome this thorough disclosure and will estimate capital needs on their own assumptions. We believe the funding, equity and debt markets will tier banks based on banks’ perceived solvency position under a market-realistic stress scenario (ie, one which is harsher than the CEBS test and includes stressing the banking book)."
- Market Reaction – "The EURUSD weakened immediately preceding the stress test and strengthened following the release; it is now almost flat relative to yesterday’s close. The ADRs of BBVA and SAN also strengthened into the release and are up on the day. The ADR of NBG strengthened into the release but is slightly down on the day. This early market reaction supports our view that, while the banks sector may not react excessively, there is likely to be tiering within the 91 names."
- Methodology – "The methodology is as expected (see European Stress Test: Not Much New News, 8 July 2010) but more detail has been provided on the specific assumptions used for macro variables, loan losses, trading losses and sovereign haircuts. No surprises here."
Citigroup European Banks Stress Tests 20100723
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