EU banks fail to get clean bill of health

Italy’s Monte dei Paschi, Austria’s Raiffeisen, Spain’s Banco Popular and two of Ireland’s main banks came out with the worst results.

People talk in front of a Monte Dei Paschi bank in downtown Rome, Italy, in this January 21, 2016 file photo. Speculation that a long-awaited takeover of Monte dei Paschi di Siena could be drawing nearer helped to support the Italian bank on Monday after a recent steep fall in its share price. REUTERS/Max Rossi

Banks from Italy, Ireland, Spain and Austria fared worst in the latest European Union stress test, which the region’s banking watchdog said showed there was still work to do in order to boost credit to the bloc’s economy.

Eight years since the collapse of Lehman Brothers sparked a global banking meltdown, many of Europe’s banks are still saddled with billions of euros in poorly performing loans, crimping their ability to lend and putting off investors.

Fare badly

“While a number of individual banks have clearly fared badly, the overall finding of the European Banking Authority — that Europe’s banks are resilient to another crisis - is heartening,” Anthony Kruizinga at PwC said.

Italy’s Monte dei Paschi, Austria’s Raiffeisen, Spain’s Banco Popular and two of Ireland’s main banks came out with the worst results in the EBA’s test of 51 European Union (EU) lenders.

“Whilst we recognise the extensive capital raising done so far, this is not a clean bill of health,” EBA Chairman Andrea Enria said in a statement. “There remains work to do.”

Italy’s largest lender, UniCredit, was also among those banks which fared badly, and it said it will work with supervisors to see if it should take further measures.

Germany’s biggest banks, Deutsche Bank and Commerzbank, were also among the 12 weakest banks in the test, along with British rival Barclays.

Monte dei Paschi, Italy’s third largest lender, had been scrambling to pull together a rescue plan and win approval for it from the European Central Bank ahead of the test results. The Italian bank confirmed less than an hour before the results that it had finalised a plan to sell off its entire portfolio of non-performing loans and had assembled a consortium of banks to back a 5 billion euro capital increase.

The EBA looked at how banks could withstand a three-year theoretical economic shock which ended with the Italian lender, the world's oldest, having a core equity capital ratio of minus 2.44 per cent.

Third test This was the third stress test in the EU since taxpayers had to bail out lenders in the 2007-09 financial crisis, with no pass or fail mark this time round.

The test involved scenarios including EU economic output 7.1 per cent below the baseline over the next three years and a 20 per cent drop in interest income.

“Based on these results European banks do have deeper loss absorbing capacity than previously, but concerns clearly remain around profitability and the appetite of equity investors to invest in bank stocks,” said Steven Hall of KPMG.

Analysts have informally set a basic pass mark of 5.5 per cent, the threshold set in the last round of tests in 2014, and a weak result could raise question marks over dividend payments.