Who Is Likely to Fail Europe's Bank Stress Tests?


The hype around results of pan-European bank stress tests is growing with each hour that nears the deadline for publication. So much so that even the deadline is now a hotly disputed issue.

Will the results finally throw light on how deeply affected European banks are by the various market disturbances? Yes and no, various analysts told CNBC.

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The Committee of European Banking Supervisors (CEBS) will publish results of the tests of 91 banks in 20 European Union countries on Friday and officials such as European Central Bank President Jean-Claude Trichet have said that this should bring back confidence in the continent's banking sector.

"Very few banks will fail this stress test and we don't think there will be a lot of capital raising," Antonio Ramirez, analyst at Keefe, Bruyette & Woods (KBW) told in a telephone interview.

The CEBS initially said the results will be released at 5 pm London time (noon New York time) but various sources were quoted in the media over the past 24 hours saying that maybe they would be released before European markets open on Friday.

The timing of the release "is quite irrelevant," Ramirez said. "We have been waiting for these stress tests for a year, we can wait another day."

The criteria that will be used in European stress tests have not been made public, but various media and analyst reports suggest that a Tier-1 capital ratio - equity capital and disclosed reserves as a percentage of the bank's assets – of 6 percent is one of the conditions for a bank to pass.

This would be in line with criteria used in the US and UK stress tests last year.

Numbers Unclear

KBW has run its own, harsher stress test on banks that are listed across Europe. According to this, 10 banks are likely to fall below the 6 percent Tier 1 ratio and would need to raise 9.8 billion euros ($12.5 billion) – although the number would be higher if the unlisted sector were added, KBW specified.

The banks that would fail the KBW stress test—assuming that dividends would be cut to help preserve capital—are Greek banks National Bank of Greece (NBG), Piraeus, EFG, Marfin and Alpha Bank, Portugal's BPI, Germany's Deutsche Post Bank (DPB), Italy's Monte Dei Paschi Di Siena, Bank of Ireland and Bank Inter Portugal.

Very few banks will fail this stress test.
Analyst, KBW
Antonio Ramirez

"Clearly this is a small number, but would be greatly increased if we added the unquoted sector," KBW said in a research note.

Besides the listed banks, Spanish savings banks—cajas—and German regional banks—Landesbanken—are in danger of having poor results, according to various analysts.

In a tough economic environment over the next three years, but without a sovereign default, Spanish commercial banks would lose 5 percent of their Tier-1 capital but this should be readily absorbed by their existing capital cushion, according to MF Global analysts.

Savings banks, on the other hand, would lose 22 percent of their Tier-1 capital and would need to be recapitalized, MF Global analysts calculated.

In Germany, Landesbanken are likely to suffer because, as IMF modeling shows, they have yet to account for losses incurred because of the writedowns on securitized assets, especially collateralized debt obligations, the MF Global research note shows.

Bad News Baked In

Macquarie Research analysts estimate that "only a handful" of banks would need to be recapitalized in a stress test scenario in which a 20 percent markdown on Greek debt is assumed.

These are all the Greek banks, Bankinter, Postbank, Banco Popolare, BCP, Commerzbank and Sabadell, according to Macquarie Research.