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Can these banks handle the ‘stress’?

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European banks have not been in the best of their health for a long time and the growing uncertainty around U.K.'s vote to leave the European Union hasn't helped either.

The second-quarter earnings' bonanza has seen worryingly mediocre results across the board for European banks and their share slide has weighed on the overall European stock markets. But with the European Central Banks (ECB) stress test results looming over markets this week, banks are starting to worry about the outcome.

"Since the financial crisis, there has been a lot of unease and uncertainty, particularly within the euro zone," Nitin Rakesh, CEO and President of Syntel told CNBC. "There is currently a great deal of attention on Brexit as well as the Italian banking crisis, so the ECB will be hoping that the stress tests reveal that the banks are in a position to cope with adverse trading conditions."

The results of the European Banking Authority (EBA) stress tests due on Friday at 2100BST will see an assessment of 51 banks. They'll not be given a pass or fail mark, as in the past, but will gauge the general health of thes banks.

"The resilience of EU banks will be assessed against a common macroeconomic baseline and adverse scenario based on year-end 2015 figures, and applied over a period of three years to end-2018," the EBA said in a statement on their website.

CNBC looks at some of the banks that analysts believe can come under fire on Friday:

Deutsche Bank

The German lender is in the midst of troubling times ever since the referendum results, when the bank's shares fell sharply. Stocks in Deutsche Bank are down nearly 46 percent since the start of the year. Adding to the worries, the second-quarter earnings showed profits fell sharply to 987 million euros ($1095 million) from 2.7 billion euros in the first half of the year.

The bank suffered another massive blow after the International Monetary Fund (IMF) branded Deutsche Bank one of the riskiest banks globally. Referring to Deutsche Bank as a "globally systemically important financial institutions," the report pointed to the German lender as the most important net contributor to systemic risks, followed by HSBC and Credit Suisse.

Italian banks

Troubles for the Italian banking sector seem never-ending. Banks across the board in Italy, including Unicredit which is their largest, have seen their share price decline sharply since the start of the year. Unicredit's shares are down 60 percent year to date.

"Italy's banking system did not experience a real estate or credit bubble during the last crisis, unlike those of many of its European counterparts," Maria Paola Toschi, global market strategist at JPMorgan Asset Management, told CNBC via email.

"However, its current problems stem from its high lending exposure to small and mid-undercapitalized companies, which represent the core of the Italy's industrial sector."

Italian policymakers and EU officials have been scrambling to put together a deal to save the Italian banking system that is suffering from a massive problems of non-performing loans estimated to be a total of 360 billion euros ($400.7 billion).

Banca Monte dei Paschi di Siena (BMPS) is another bank that analysts have warned may ring alarm bells on Friday. Italy's third largest lender has repeatedly received bailouts in recent years. Shares in BMPS have been particularly volatile in the past few months and is down nearly 77 percent since the start of the year.

"Italian banks are set to be thrown under the spotlight on July 29th by the ECB, with many regional players, led by Monte dei Paschi, expected to be exposed as structurally weak and sitting on a tinderbox of unproductive non-performing loans (NPL)," Steve Hussey, Head of Financial Institutions Credit Research at AllianceBernstein told CNBC via email.

"Several Italian banks are likely to drop below the minimum requirements in the ECB's 'adverse financial scenario testing' (and thus require recapitalization) the real question is how the tightrope of recapitalization can be achieved within the new Bad & Doubtful Debt Reserve (BRRD) framework."

Spanish banks

Some of the Spanish lenders such as Banco Santander, Banco Popular Español and Banco de Sabadell are three banks that analysts we spoke to flagged as risky ahead of the stress test results due on Friday. However Santander's Chief Financial Officer Jose Garcia Cantera told CNBC that the bank is not too worried about the stress test results.

"In the previous stress test conducted two years ago, we were the banks that destroyed the least amount of capital in stress. This exercise is different. They are new methodologies, new risks to be taken into account, for instance conduct account but we clearly believe that we will be among the least affected by the stress tests."

The bank reported a second-quarter net profit of 1.3 billion euros, down 49.7 percent from the same period last year. Recently, the Spanish lender's U.S. business failed a US Federal Reserve stress test for a third consecutive year.

Meanwhile, Spain's Bankia said last week that it is not worried about stress tests results since Spanish banks in general have done their homework. That's according to Reuters.

Other banks to watch

While not included in this round of tests, analysts have also flagged Greek banks as ones that may pose risk. Some analysts also told CNBC that banks across Europe have done enough to pass the ECB stress test but this test is designed to see if these banks can respond to sudden turbulence.

"With historically low interest rates and the difficulty of making returns in a low margin environment, banks that have high legacy system costs are eating into their profits. Across the Eurozone, banks should be looking at ways that technology can streamline their operating costs, particularly through automation tools which are revolutionizing the entire industry," Syntel's Nitin Rakesh told CNBC via email.

It is also worth keeping an eye on banks that failed the 2014 and 2010 ECB stress tests.

Banks that failed the 2014 ECB Stress test are:

  • Austria: Oesterreichische Volksbanken
  • Belgium: AXA Bank Europe, Dexia
  • Cyprus: Hellenic Bank Public Company
  • Greece: Eurobank Ergasias, National Bank of Greece
  • Republic of Ireland: Permanent TSB
  • Italy: Banca Carige, Monte dei Paschi, Banca Popolare di Milano, Banca Popolare di Vicenza
  • Portugal: Banco Comercial Portugues
  • Slovenia: Nova Kreditna Banka Maribor, Nova Ljubljanska Banka

Banks that failed the 2010 ECB Stress test are:

  • Spain: CajaSur; Caixa Catalunya; Caixa Sabadell; Caja Duero-Caja Espana and Banca Civica.
  • Gemany: Hypo Real Estate Holding AG
  • Greece: Agricultural Bank of Greece SA

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