PKO Bank Polsky, DNB Bank And Santander The Strongest European Banks To Face An Adverse Scenario

PKO Bank Polsky, DNB Bank and Santander are the strongest European banks to face an adverse scenarioThe EBA published the results of the latest stress tests of European banks

At the close of European markets on Friday, the EBA published the results of the latest stress tests of European banks. On this occasion, the adverse scenario with which it worked incorporated the following suppositions about the EU: an accumulated fall in GDP of 2.7% over three years, an increase in unemployment to 9.7% in 2020, an increase in inflation of only 1.7% after three years and a fall in the price of housing of 19.1% and of commercial properties of 20% at the end of three years.

The results of the tests carried out on 47 banks in the EU, plus one in Norway, and which covered 70% of banking assets in the EU, revealed that in adverse scenario would produce a negative impact of -395 base points in the capital ratio CET1 fully loaded (-410 base points of the transitory definition) to place itself in 10% at the end of 2020 (10.3% transitory). Figures which suppose a considerable fall compared to the 14.0% of the CET1 fully loaded ratio and 14.4% of the CET1 ration under its transitory definition in 2017, even if these figures improve to 15.3% and 15.4% respectively in case of the central scenario.

The results of the tests already take into account the application of the IFRS 9 Financial Instruments norms, which deal with questions like the classification and measurement of financial instruments, the deterioration in the value of financial assets and hedge accounting, replacing the requirements of the IAS 39 Financial Instruments: Recognition and Measurement norms. The impact of this new norm in force from 1 January implied a negative impact of -20 base points at the end of 2017 on the CET1 fully loaded capital ratio and -10 base points in its transitory definition.

As far as the results of the Spanish banks submitted to the tests are concerned, the four banks which formed part of the 48 which the EBA has submitted to the new stress tests, Santander, BBVA, Caixabank and Sabadell, overcame the tests although they came out a little below the average.

1. BBVA. CET1 fully loaded 2017 10,73% and, in 2020, base scenario 12,72% and tension scenario 8,80%.
2. Banco Sabadell. CET1 fully loaded 2017 12,03% and, in 2020, base scenario 12,89% and tension scenario 7,58%.
3. Banco Santander. CET1 fully loaded 2017 10,61% and, in 2020, base scenario 13,87% and tension scenario 9,20%.
4. CaixaBank. CET1 fully loaded 2017 11,50% and, in 2020, base scenario 13,60% and tension scenario 9,11%.

According to these figures, BBVA occupies the fifth place in the ranking and Caixabank sixth, given that they would suffer an impact significantly below the sector average. As for Sabadell, the test did not take account of the sanitising of accounts carried out by the bank in 2018. In general terms, the banks comfortably passed the strength tests thanks to the efforts they have made to reduce their exposure to non-performing loans and to improve their capital ratios.
The strength tests were carried out on the banks’ balance sheets at the end of 2017 and therefore did not reflect in the capital ratios the sale of property assets by Caixabank, BBVA, Santander and Sabadell during the course of this year.

Moreover, apart from passing the tests, the four Spanish banks mentioned were included in a list of 25 entities which, in the adverse scenario, could see their payment of dividends submitted to the control of the regulator.

No entity is placed below the critical level of 5.5% in terms of CETI 1 fully loaded, whereas in 2016 Banco Monte dei Paschi de Siena (MPS was the only bank which would see its capital evaporate in the first category. Comparing different countries, the UK shows the lowest level of CET 1 fully loaded in the adverse scenario, 8.29%, compared to the Swedish financial system which would have the highest with 17,9%. In effect, the worst in the impact ranking among entities listed on stock markets are: Barclays (CETI 1 FL: 6.37%; -691 bp), Lloyds (6.8%; – 725 bp), RBS (6.8%; – 598 bp) as well as Deutsche Bank ( 9.44%; -589 bp), although its ratio remains above 8%. The banks with biggest impact would be NV Bank Nederlandse (-846 bp with a CETI 1 FL of 22.33%) and NRW Bank (- 769 bp; CETI 1 FL of 33.96%), although they would maintain solvency ratios well above the average. The entities with the greatest ability to confront a severe economic crisis scenario are: PKO Bank Polsky (15.62%; – 64 bp); DNB Bank (15.03%; – 153 bp) and Santander (9.25%; – 164 bp).

Once the results have been analysed, it is worth considering how tensioned the adverse scenario has been. This base scenario assumes growth in the EU od 2.2% in 2018, 1.9% in 2019 and 1.8% in 2020. The real figures will almost certainly worse. Nevertheless, the tension scenario assumes a deviation from the base scenario of -8.3% in terms of growth by 2020, and works with rates of decline of – 1.2% in 2018, – 2.2% in 2019 to allow, afterwards, for growth of 0.7% in 2020. Also it allows for a deviation upwards of 3.3 bp in the unemployment rate and downwards of – 3.5% in inflation up to 2020.

Overall, at a time when we are seeing a cyclical moderation and, in addition, when we can anticipate that the next recession in the EU will be of moderate strength, we can assess that the adverse scenario was adequate. A scenario which, according to the EBA, would include a wide “range of macroeconomic risks which could be associated with Brexit”.

Moreover, as the EBA argues, it is certain that episodes of tension as we have experienced in recent weeks in the markets would be included in the tension scenario. For example, in average in the EU, it assumes a deviation in the prices of shares of -29% in 2018, – 27.2% in 2019 and – 21.5% in 2020 in comparison with the base scenario; figures that rise, in the case of Italy and Spain, to maximums of – 34.6% and – 33.8% in 2020 respectively. As far as long term interest rates are concerned, in the case of Italy they rise to 3.7% in 2019 and 4% in 2020, while with Spain it works with figures of 3.3% in 2019 and 3.5% in 2020.