The disclosed data mainly involve each bank’s composition of capital and risk-weighted assets (RWA), market risk, including exposures to sovereigns and credit risk including the loan-to-value (LTV) ratios across portfolios. In theory, one of the exercise targets was to make all these figures “fully comparable” among European banks.
The information does not include any stress test component as it did in 2011, while the next Europe-wide stress test will be performed by EBA in close cooperation with the European Central Bank (ECB) in the second half of 2014. At the same time, ECB will also carry out a comprehensive assessment of large eurozone banks, including an asset quality review.
For the four Greek banks (Alpha, Eurobank, National and Piraeus) that participated in the EU-wide exercise, there are some important conclusions to draw from the released data.
The first finding relates to capital ratios. which appear inflated compared to what was reported by banks when they released their first half results in August. In particular, Alpha EBA Core Tier 1 (CT1) ratio was disclosed by EBA (according to CRD3 rules) at 14.4 percent (from 13.9 percent in first half results), Eurobank at 12.4 percent (from 8.1 percent), National at 8.6 percent (from 9.2 percent) and Piraeus at 15 percent (from 13.8 percent).
The main difference lies with the recognition of deferred tax asset (DTA) related to the huge PSI losses (24.1 billion for the four banks and 31.9 billion for the sector) last year. The Greek regulator (Bank of Greece) allows Greek banks to recognise in regulatory capital only a part (20 percent of CT1) of the total PSI-related DTA, while CRD3 rules allow full recognition. This explains the material difference (4.3 percentage points) of Eurobank ratios under the two methodologies as well as those of Piraeus (1.2 percentage points) and Alpha (0.5 percentage points).
Eurobank has recently initiated a share capital increase process to raise 2 billion euros through a marketed equity offering to restore its CT1 ratio above the required levels. The decision is based on the estimated capital shortfall below the required levels, although one could conclude that Eurobank is adequately capitalised by only focusing on the CT1 ratio of 12.4 percent reported in the EU-wide exercise.
The case of National is more complicated since the positive impact from the full PSI-related DTA recognition was more than offset by the non-application (by the EBA) of the IRB methodology for Finansbank, which had not been officially approved by the regulator at the end of June 2013 and was, therefore, not recognised in EBA exercise.
The cases of both Eurobank and National highlight the potential discrepancies – and therefore misleading conclusions – that could emerge when widely-applied rules are followed, which do not take into account the country-specific regulatory guidelines.
The average LTV ratios for Greek residential mortgages stands at 70 percent for the four banks, with Alpha and National below the average at 61.8 and 67.4 percent respectively, Piraeus at 69 percent and Eurobank at 81.5 percent. The respective ratios for the group residential mortgages are similar to the Greek figures for Eurobank and Piraeus, higher for Alpha (63.6 percent) and lower for National (65.1 percent).
Following PSI and debt buyback last year, Greek banks exposure to Greek government bonds is rather limited (up to 1 billion euros each), except National holding Titlos, a 5.1 billion euros nominal value floating rate asset-backed note, which was excluded from both bond transactions.
The four Greek banks also hold a 4.5-billion-euro special bond (also excluded from PSI and debt buyback) in exchange for preference shares granted to the Greek state under the first pillar of a liquidity and capital support program launched in 2009.
*Read the original article here.