Stress tests: EU banks start tarting up

Everyone wants to look neat in next stress tests’ picture and the future banking union’s film.

EU-wide entities participating in the ECB’s examination feel under pressure to present capital ratios as higher as possible, always according to Basel III’s rules. Markets are concerned about Deutche Bank’s or Unicredit and Intesa’s capital breach, but at least greet that Spain’s can account deferred tax assets for its own funds.

The question currently affecting Deutsche Bank is they bet on deleveraging an amount of €250 bn until year 2015, about 12% of total capital, and some of top 20 investors disagree this strategy as it could decrease the company’s market share. At this moment, the German bank’s Core Tier capital stands at 9.7% against the range of 9.3%-10.9% of their peers and its leverage ratio records 3.2%.

What those investors require the entity is to leave the deleveraging plan and increase capital by €5 bn. Sabadell’s analysts at Madrid side investors and see this move within Deutsche Bank would climb its base capital to 10.3% y leverage ratio to 4%.

“Of course it involves the bank’s price to lose 14%, but its growth potential continues to be around 18%”.

Furthermore, the biggest German bank could imminently issue so-called CoCos bonds to raise capital and close its €5 bn gap. Angela’s Merkel’s government has been closely looking the tax deductibility of these financial devices in order to assess if they were appropriate or not for the country’s banks. Once confirmed that point, it is expected a flood of contingent convertible bonds coming from German banks. Deutsche Bank would be the first to take action. Other brands such as Commerzbank, NordLB or Aareal Bank would follow the same path with the same intention of reinforcing their balance sheets and solvency ratios.

As pointed out by experts at Santander, “markets forecast about €10 bn of German CoCos yielding over the sector’s current average of 6%.”

Italian banks are expected to be the outperformers in next October’s stress tests due to their high non-performing loans rate and especially their limited levels of coverage. Italy’s two largest banks, UniCredit and Intesa Sanpaolo are teaming up with U.S. private equity firm Kohlberg Kravis Roberts and also restructuring adviser Alvarez & Marsal to set up a sort of bad loans vehicle in order to raise capital before the ECB’s stress test come.

UniCredit as well as Intesa already created their own internal bad banks. Unicredit’s will pool €87 bn of bad debt, which is to reduce to almost half by 2018, while Intesa’s gathered €46 bn.

“Despite the bad banks’s operation, both entities’ capital ratios will continue to be short”, Santander experts reminded.

Spain’s goverment approved a Decree-Law on Wednesday to enable national banks to maintain deferred tax assets within their capital instead of deducting as Basel III’s rules fixed. The new law will have a significant impact on solvency’ figures of Spanish entities since they could save and monetize about € 40 bn. Almost the same amount of € 41,3 bn the sector received in terms of financial bail-out.

About the Author

Julia Pastor
Julia Pastor has a broadly experience in business writing for Consejeros Media Group at Consejeros, Consenso del Mercado and The Corner. Previously, she worked for the financial news agency GBA and contributed to El País Business. She holds a Master in Financial Journalism and a degree in English from the Complutense University in Madrid.

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