Banca Monte Paschi di Siena May Fail Bank Stress Test, Credit Suisse Says

Deutsche Postbank AG, Banca Monte dei Paschi di Siena SpA and most of Greece’s largest lenders are the only publicly traded banks that may fail European stress tests and be forced to raise capital, Credit Suisse Group AG said.

An economic downturn combined with losses on government bonds would force Deutsche Postbank to raise 1.36 billion euros ($1.72 billion) in capital to meet Tier 1 capital requirements of 6 percent, while Banca Monte dei Paschi would need 592 million euros, Credit Suisse analysts led by Daniel Davies wrote in a note to clients today. National Bank of Greece SA, Piraeus Bank SA, Agricultural Bank of Greece SA and TT Hellenic Postbank SA would together need a total of 2.61 billion euros, it said.

“Across our coverage universe, we see little chance of any of the large non-Greek banks failing a stress test,” Credit Suisse said in the note. “Greek banks would only fail in the event of a severe haircut on their sovereign-debt holdings.”

Piraeus spokesman George Marinopoulos wasn’t immediately able to comment. Calls to National Bank, Agricultural Bank and Deutsche Postbank went unanswered and Banca Monte dei Paschi di Siena declined to comment.

The tests on 91 of Europe’s banks are designed to assess how they will be able to absorb losses on loans and government bonds, the Committee of European Banking Supervisors said late yesterday. Lenders that account for 65 percent of the European Union banking industry will be tested, including 14 German banks, 27 Spanish savings banks, six Greek banks, five Italian banks, four French banks and four British banks, CEBS said.

Greek Haircut

Regulators have told lenders the assessments may assume a loss of about 17 percent on Greek government debt, 3 percent on Spanish bonds and none on German debt, said two people briefed on the talks who declined to be identified because the details are private. The results are due to be released on July 23.

Deutsche Postbank shares declined 0.6 percent to 24.54 euros at 4:51 p.m. in Frankfurt trading, while Banca Monte dei Paschi was little changed at 97 euro cents. National Bank of Greece rose 5.5 percent to 9.6 euros and Piraeus Bank gained 2.9 percent to 3.87 euros on the Athens stock exchange.

In its tests of European banks, Credit Suisse used a “comprehensive mark-to-market approach” in which it assumed that the regulators will require all sovereign-debt portfolios to be marked to the current credit default swap curve, minus 3 percent, rather than imposing “quantitative haircuts.” In a scenario only taking into account the impact of sovereign debt losses and excluding a macro-economic downturn, only Piraeus and Agricultural Bank would need to raise new capital, it said.

‘Significant Stresses’

“No bank in our coverage universe ends up requiring recapitalization to meet a 6 percent headline Tier 1 hurdle rate, except ATE and Piraeus,” Credit Suisse said. Publicly traded banks have “small enough sovereign exposure and large enough Tier 1 capital to withstand significant stresses.”

The Greek banks included in the stress tests are National Bank of Greece SA, the country’s largest lender, EFG Eurobank Ergasias SA, the second-largest, Alpha Bank SA, Piraeus, Agricultural Bank and TT Hellenic Postbank SA.

“On our calculations, Alpha Bank and Bank of Cyprus appear to be the least impacted, whereas National Bank of Greece and Piraeus could suffer the most,” HSBC Pantelakis Securities SA analyst Dimitris Haralabopoulos said in a note to clients today.

Capital Shortfall

A 17 percent haircut to the value of Greek government bonds would shave some 30 percent, or 7.5 billion euros, off the equity and capital of the Greek and Cypriot banks included in the stress tests, Haralabopoulos said. That would lead to a decline of about 3 percentage points to their Tier 1 ratio, leaving it just below 8 percent, compared with 10.7 percent in the first quarter of this year, said Haralabopoulos.

The capital shortfall resulting from such a haircut would only “be sizeable” if the banks are forced to maintain a 10 percent Tier 1 capital ratio, Haralabopoulos said. In such a scenario, the Cypriot and Greek banks included in the tests would lack as much as 5.8 billion euros in capital, he said.

“In any case the Financial Stability Fund, created as part of the 110 billion-euro European Union/International Monetary Fund bailout package for Greece, has been designed to inject up to 10 billion euros in capital to the sector, if needed,” Haralabopoulos said. “Hence the FSF would more than cover the estimated impact to our universe’s capital from the application of a 16 to 17 percent haircut to Greek government bonds.”

Tier 1 ratios measure a bank’s ability to absorb losses.

Some analysts have a more downbeat assessment of European banks’ ability to withstand losses on loans and sovereign debt.

Allied Irish

Deutsche Bank AG analyst Matt Spick in London said a number of banks, including Allied Irish Banks Plc and Bank of Ireland Plc, Germany’s Commerzbank AG, Greece’s National Bank and Eurobank and Italy’s Banca Monte dei Paschi die Siena and Banco Popolare SC may fail the European stress tests because they wouldn’t meet the required Tier 1 ratio of 6 percent.

The scenario being tested by European regulators on 91 European banks “assumes a 3 percentage point deviation of gross domestic product” for the EU compared with the European Commission’s forecasts and a “deterioration of sovereign risk” affecting government bonds, according to the CEBS statement.

“We expect most of the listed banks we cover to pass a stress test, even one that includes some sovereign default,” MF Global analysts led by Simon Maughan said in a note today, citing factors such as capital and profitability as well as sovereign debt. “Those at greatest risk of failing” include Bank of Ireland and Banco Bilbao Vizcaya Argentaria SA, they said.

To contact the reporter on this story: Niklas Magnusson in Stockholm at nmagnusson1@bloomberg.net

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