European Banks Face Potential €132.8bn in Capital Shortfall

Following in the footsteps of the US Federal Reserve and ahead of the European Central Bank (ECB), AlphaValue, an online provider of pan-European independent equity research, has stress tested 31 of Europe’s biggest listed banks to reveal that at least 21 banks would be forced to raise significant additional capital if placed in a 100% stress test condition, or in other words, a worst case economic scenario with a doubling up of the current recession magnitude. AlphaValue’s research showed that listed banks would need to raise a total of €132.8bn in capital under such conditions.

Nearly two thirds of this amount relates to six of the largest banks in Europe: HSBC – €23.5bn; UBS – €16.2bn; Barclays – €15bn; Dexia – €13.7bn; BNP Paribas – €10.1bn; and Natixis – €7.2bn. Partially nationalised banks, such as Lloyds Banking Group and Royal Bank of Scotland, and banks with an insignificant lending business are not included in this study. AlphaValue also excluded banks with limited operations in Europe, such as Standard Chartered, and those banks without precise enough data about impairments in the fourth quarter of 2008 and the first quarter of 2009.

Even under current conditions (the base case scenario), the AlphaValue stress tests reveal that listed European banks need €31.3bn to reach capital adequacy requirements of 8% Tier 1. AlphaValue identified that 10 European banks would struggle to meet this level of capital.

According to AlphaValue, HSBC and BNP Paribas fall among the top six undercapitalised banks due to their high exposure to mortgages and consumer loans, which was aggravated in the case of BNP Paribas as it presented a slight shortage of capital with a Tier 1 capital adequacy ratio of just 7.8% rather than the desired 8%. However, AlphaValue believes that HSBC and BNP Paribas’ levels of high-quality credit should allow them to raise the funds if necessary. Furthermore, both banks have the ability to increase profits by cutting operating expenses or reduce their assets in order to increase capital – something that BNP Paribas has already embarked on in the first quarter of 2009.

Banks that passed the stress test include two Spanish banks, Santander and BBVA; one Italian bank, Mediobanca; one German bank, Deutsche Bank; and the Swedish banks.

Pierre-Yves Gauthier, head of research at AlphaValue, said: “Europe-wide stress testing exercises are underway but there are currently no plans to publish the results. Stress testing is a long-standing practice undertaken by regulators and banks’ internal departments to establish whether banks have enough capital to hold up against economic shocks. However, stress tests have generally not enabled regulators and banks to identify the risk relating to subprime loans, liquidity risk, or to predict the effects of contagion from one banking system to another. Therefore, a high level of vigilance is needed in order to avoid the syndrome of ‘things returning to normal’.”


Related reading

New consumer banking head for Citi Asia Pacific