EU-BANKS/ITALY-GREECE-REACTION Italian, Greek banks generally better than expected - ECB stress tests

Record ID: 565621

  • Title: EU-BANKS/ITALY-GREECE-REACTION Italian, Greek banks generally better than expected - ECB stress tests
  • Date: 27th October 2014
  • Summary: SIENA, ITALY (FILE - JUNE 27, 2012) (REUTERS) VARIOUS OF HEADQUARTERS OF ITALY'S OLDEST BANK, MONTE PASCHI DI SIENA
  • Embargoed: 11th November 2014 12:00
  • Keywords:
  • Location: Greece
  • Country: Greece
  • Topics: General
  • Reuters ID: LVADIT9NSJVHFNINR64B701NJI1T
  • Story Text: The results of European banking stress tests designed to check the health of Europe's banks and their ability to withstand future crises showed that the Italian and Greek sectors were generally robust and further capital requirements would not be necessary, analysts said on Monday (October 27).
    The Europe-wide health exam laid bare the extent of the economic crisis in Italy, where the banking system has been caught in an increasingly dangerous spiral with the country's massive public debt.
    The European Central Bank found 15 Italian lenders collectively overvalued their loans by 12 billion euros, accounting for a quarter of the overvaluation of loans across the 130 banks the ECB looked at.
    The Bank of Italy said that the chronic weakness of the economy, which is struggling to emerge from the longest recession since World War Two, had been the main factor behind the stress test result for Italian banks and warned that without improvement, lenders would continue to struggle.
    The director general of the Italian Banks Association (ABI) said after the results were published that a Europe-wide stress test that saw nine Italian banks fail in reality confirms the ''robustness'' and ''soundness'' of the Italian banking system.
    But Monte dei Paschi, which has racked up 9.3 billion euros of losses over the past three years, revealed the biggest outstanding capital shortfall of any of the 130 banks in the ECB's stress tests, which were designed to prepare the continent's banks for unexpected systemic shocks.
    Shares in the bank - Italy's oldest - slumped on Monday, reversing inital gains in early trade on the European Union's banking index.
    Nine Italian banks in total failed the test, the most of any country, although five of these made up the shortfall through capital increases during 2014 and another two managed to fill the gap with supplementary measures.
    Alongside Monte dei Paschi, Genoa-based savings bank Carige <CRGI.MI> reported a shortfall of 814 million euros, bringing the total for the Italian banking system to 2.9 billion euros.
    Italy's two biggest banks, UniCredit and Intesa Sanpaolo passed comfortably and the central bank said it was reassured about the banking system's overall solidity.
    The director general of Italy's Banks Association said a comprehensive look at the results reveals the soundness of Italy's banking system despite the failings.
    "We think that the comprehensive assessment outcome has confirmed the robustness and the soundness of the Italian banking sector, confirming the analysis also of the IMF that was published last year," Giovanni Sabatini, director general of ABI, told Reuters on Monday.
    "Let's stick to the facts: First of all, as of September 2014, after the capital increase and the additional provisioning, no Italian banks failed the asset quality review test. But also a substantial excess of capital, about 25 billions, emerged from this analysis," Sabatini said.
    "You have to consider that this positive results was been achieved without state aids, while German banks, Spanish banks and other banking sectors have used substantial amounts of state aid over time. No Italian bank was supported by state aid during this long crisis," he added.
    Describing the stress tests ''a black swan'', Sabatini said Italy's banks are doing well in the most extreme economic situation the country ever faced.
    "We think that if you add the stress test hypothesis to the current situation of Italy, you have a drop of 12 percent points in GDP, five years of consecutive recession, which is something that never occurred during the history of Italy," he told Reuters.
    "Notwithstanding these extreme conditions, which would imply a collapse of the Italian economic system, only two banks failed the exam. So, we think that in the end the result is positive," he added.
    "Overall the reaction of the market to the result is positive. Of course, for the two banks, Monte dei Paschi and Carige, the reaction of the market was negative. I think that the market is overreacting because there is some uncertainty on how the, particularly Monte dei Paschi, will cover this capital shortfall," Sabatini said.
    Yields on Italian 10-year government bonds -- the largest market in the euro zone's southern periphery -- were 2 basis points lower even though nine Italian banks fell short in the tests, with Monte dei Paschi and Banca Carige still needing to raise funds.
    In Greece, one of the three countries where the tests reveleaed the biggest problems to be, along with Italy and Cyprus, initial reaction to the results saw shares jump in early trade.
    Among the major listed banks in the whole bloc, the biggest hits were to Greece's Piraeus bank, whose core capital fell by 3.7 percentage points after the ECB adjusted the bank's capital to reflect the new asset valuations.
    But the ECB also concluded that banks' capital holes had since chiefly been plugged and that only 10 billion euros remained to be raised across Italy, Cyprus and Greece.
    While the ECB's test showed three Greek banks with a capital shortfall based on a static view of their end 2013 balance sheets, only one - Eurobank - had a tiny gap after restructuring plans and capital raised after 2013 were taken into account.
    "Based on the results of the 31st of December, you had three Greeks banks that failed," said Eurobank analyst Nick Koskoletos, regarding projections based on a snapshot of bank financing on December 31 as part of the stress tests.
    "But when you incorporate the capital actions that were completed in 2014 plus the restructuring plans, effectively, there are practically no capital requirements for any of the Greek banks," he added.
    Of the Greek banks, only Alpha Bank passed the stress test using the end-of-year 2013 data.
    Koskoletos added that the banks could now return to focussing on lending and injecting liquidity to try and boost stubborn European economic growth, and in Greece's case, look beyond capital requirements imposed as part of its EU bailouts.
    "With regards to the economy it's the fact that it releases any requirement that actually hold the HFSF capital buffer that was there, the 11.4 billion (euros)," he said.
    "So it basically facilitates the government's views and intentions of trying to formulate some sort of a new architecture for a post-MOU (Memorandum of Understanding)," Koskoletos added, referring to Greece's bailout.
    The exercise, which saw officials trawl through more than 40 million individual bank figures, had two parts - a strict review by the ECB of assets such as loans, followed by a wider test of how banks would cope with a new economic crash.
    It is the fourth attempt by Europe to clean the stables of its financial sector and has been billed as much the most rigorous.
    Previous efforts failed to spot problems, giving lenders in Ireland a clean bill of health shortly before a banking crash drove the country to the brink of financial collapse.
    Banks with a capital shortfall will have to say within two weeks how they intend to close the gap. They will then be given up to nine months to do so.
    European Banking Authority (EBA) held the stress tests as part of a sector-wide check up by the European Central Bank before taking it takes on supervision from national regulators in November.
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