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German, Spanish Banks to Suffer in Tests: Analysts

Friday, 15 Jul 2011 | 7:32 AM ET

The results of the banking stress tests, due on Friday after the close of European markets, will be worst for German and Spanish banks, analyst Ralph Silva of SRN told CNBC Friday.

Keith Brofsky | Photodisc | Getty Images

As many as 15 lenders are set to fail the tests, according to Reuters.

German bank Volksbank, which announced on Thursday that it had sold its eastern European arm VBI to Russia's Sberbank, has failed the test, Reuters reported.

Several Greek banks have announced that they are raising capital through sales or rights issues ahead of the announcement.

Piraeus Bank is negotiating the sale of its Egyptian subsidiary and EFG Eurobank said it is in talks to sell a Turkish unit. Alpha Bank shareholders have backed a rights issue.

“The German banks are going to suffer the most because they’re not in a great place right now,” Silva said.

“There are just too many banks in Spain, and the big banks are doing fine, but the smaller ones are fighting for market share,” Silva added.

The European Banking Authority will announce the results of its 2011 stress tests on Friday at 5 pm London time. This year’s assessment of banks’ ability to survive future economic shocks will be more stringent than 2010’s, which were criticised after Allied Irish Bank and Bank of Ireland passed, only to be bailed out within months.

Banks accounting for around 60 percent of the continent's total banking assets have been covered by the tests.

European banks’ exposure to struggling economies such as Greece, Ireland, Spain and Portugal is worrying the markets. Italian banking stocks in particular have plunged this month over worries about the country's high debt to gross domestic product ratio.

Last year, five Spanish banks - Diada, Espiga, Banca Civica, Unnim and Cajasur – failed the stress tests. The other two who failed were Germany's Hypo Real Estate and Greece's ATEbank.

German bank Helaba has already pulled out of this year’s tests, which examined 91 banks in total, to avoid public failure. It argued that it would have passed if the EBA had counted a debt-equity hybrid, called "silent participation", as capital reserve.

Two Spanish banks, Pastor and CatalunyaCaixa, said Thursday they will fail the test under the EBA criteria. They claimed that they would pass the test if they were allowed to include generic provisions, which have been ruled out in this year's tougher test.

“What was set up some months ago to be the final word on the solvency and the capital needs of the European banking sector will today likely throw up more questions than it will answers,” Jim Reid, strategist at Deutsche Bank , wrote in a research note.

“It could hardly have come in a worse week as the trading levels of several sovereigns are now at levels far below the planned 'stress' levels across bank's trading books.”


Under this year's stress tests, banks must show they have a core tier 1 capital ratio of 5 percent. Hybrid instruments have been eliminated from the definition of what constitutes core tier 1 capital, after criticism that tests in previous years were too lenient.

The increased amount of disclosure of information released this time should mean that bank analysts can run their own stress tests, Reid believes.

“Given that holdings in non-trading back books are likely to again not be directly tested at all then the credibility of the results could be more questionable than even last year's,” he added.

“This could either be a cathartic soul baring exercise that eventually gets us to a place where re-capitalization is at last forced upon some banks or it could just expose the full extent of the problems across the sector.”

“Let’s not call these stress tests, they’re more like transparency tests,” Silva said.

“The regulators are looking at banks on a daily basis, but just the Tier One banks because they don’t have the resources.”

This process is an attempt to give confidence to the markets, Paul Day, Chief Strategist, Market Securities, told CNBC.

“We could have stress tests number three and four coming up in the next few years,” Day said.

Silva said the fact that government cannot agree what the haircut over troubled sovereign debt should be is a problem for banks.

He believes that the big French banks, as well as HSBC and Barclays in the UK, will have done well, and that Italian banks are “doing a lot better than people think”.

10 of the 91 banks examined do not have sufficient tier one capital to meet the required 5% level, the business daily said.

Included in the number of participants likely to fail are four small Spanish savings banks and as many as three Greek banks

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