The impending outcome of the European Central Bank’s so-called comprehensive assessment, with its rigorous review of the quality of lenders’ loan assets and the resilience of their capital cushions, has European bank investors holding their breath, FastFT reports.
The FTSE Eurofirst 300 banks index, though up 3.8 per cent this year, has underperformed the overall index by 2 percentage points. Bank shares have marked time for much of the year; the bank index today is 3.4 per cent below its January peak.
Investors fear that the ECB - unwilling to take on its role as single eurozone banking supervisor before scrutinising the banks that will fall within its remit – could identify more bank capital holes. Their concern could be overdone, however.
Estimates of the likely capital shortfall vary, but Citi conservatively expects a “manageable” figure of €28bn across the banks it covers, or €13bn - allowing for capital already raised as the assessment proceeded.
That’s because many banks – such as Italian lenders Intesa Sanpaolo and UniCredit – cleaned up their balance sheets last year, making huge impairments and hefty provisions.
Major eurozone banks have added about €100bn of capital since mid-2013, Citi notes.
The ECB’s assessment should result in more trustworthy balance sheets – especially in terms of the risk-weightings banks apply to their loan assets. Fudging the risk-weighted assets denominator in banks’ capital ratio has just got harder.
The ECB’s assessment is not the only thing weighing on banks. Domestic and global sector regulation, repeated conduct claims, litigation at home and abroad and hefty fines – all directly or indirectly a response to their past failures - add to their burden.
Never mind that eurozone banks must also contend with lacklustre domestic economies and weak credit demand – seemingly regardless of ECB interest rate policy. Bank profitability is still too often sustained by falling bad loan charges - and not by a sustained uptick in revenue, though ECB’s interest rate move and funding should boost margins.
Only the Scandinavian banks have broken from the European pack, having put the regulatory piece behind them to concentrate on generating returns.
For other European lenders, however, it’s a case of while Frankfurt fiddles, the zone burns.
