The Spanish And Italian Banks Are The Least Capitalized, With A CET1 FL Of 11.9% And 13% Respectively

In general, European banks are facing the current economic crisis from a stronger position than in the past crisis of 2008-2009

Santander Corporate & Research | Yesterday, the European Banking Authority (EBA) published its 2020 transparency exercise, which takes data from individual banks at end-2019. The EBA’s findings indicate that the data “confirms the EU banking sector entered the crisis with strong solvency positions and improved asset quality, but also highlight a wide dispersion amongst banks.” Also yesterday, the European Systemic Risk Board (ESRB) published a second set of measures adopted in response to the coronavirus emergency. These include a recommendation to restrict capital distributions (affecting not only banks but other financial institutions as well) until January 2021. The instiution flagged that “these macroprudential measures refer to the five priority areas identified by the ESRB, combined with enhanced coordination, between both the authorities responsible for the different segments of the financial sector and countries. They are aimed at ensuring that the European financial system can withstand the impact and prevent losses of economic capacity and jobs from becoming even more pronounced.” The ESRB stressed that the recommendation is designed to support and complement previous initiatives undertaken by other European regulators, such as the ECB. These afore-mentioned initiatives affect different segments of the financial sector that play a critical role in the real economy in times of crisis.

The data published by the EBA confirms the message conveyed by European regulatory authorities since the outbreak of the Covid-19 pandemic. Namely that in general, European banks are facing the current economic crisis from a stronger position than in the past crisis of 2008-2009. However, in our view, it should be noted that the actions announced by the ESRB largely reflect the regulatory approach of trying to preserve the equity component of regulatory capital buffers. This is despite the more relaxed regulatory stance represented, for example, by the flexibility on solvency introduced by the ECB in March.

As highlighted by the EBA exercise, the EU weighted average CET1 fully loaded capital ratio stood at 14.8% in Q4’19, about 40bp above the Q3’19 level. This contrasts with an average CET1 of 10% at end-2011 and 11.7% at end-2013, according to the report from the EBA’s first transparency exercise conducted in 2013. According to the EBA report, the improvement in 2019 was supported by higher capital, but also by the fall in the volume of risk exposure. The EBA report flags that by December 2019, 75% of banks had a CET1 fully loaded capital ratio of over 13.4% and that the ratio for all banks was over 11%, well above regulatory requirements. However, as highlighted in the EBA press release, there is a significant dispersion around this average between countries and banks. Specifically, the Spanish banking system appears to be the least capitalized, with a CET1 FL ratio of 11.9% at end-2019, followed by the Italian system, whose CET1 FL ratio stood at 13.2% on the same date. At the other end of the spectrum are the Icelandic banking system, with a CET1 FL ratio of 21.8%, and other major EU banking systems, such as Germany, France and the United Kingdom, at levels between 14.5% and 14.6%, closer to the EU average.

In this context, we see the ESRB’s recommendation of restricting dividend payments, share buybacks and variable remuneration in banks, certain investment firms, insurers and reinsurers and central counterparties lasting for a longer period that initially envisaged by the ECB (which was up to October 2020). This acknowledges the need for these sectors to adopt prolonged measures to preserve their solvency. And at the same time to create equitable conditions in terms of the level of regulatory attention paid to this aspect amongst different kinds of financial institutions.

We therefore believe that other EU banking regulators will follow the recommendation to extend the period of restrictions on capital distributions. This is in spite of the repeated views, including in the report published by the EBA yesterday, that the EU banking system is facing the current crisis from a much better solvency position than in the previous one.