UniCredit SpA, Intesa Sanpaolo SpA and Commerzbank AG are among banks in Europe most susceptible to stress because they didn’t deleverage enough, according to a study by Switzerland’s Independent Credit View.
The rating company found that 25 banks in Germany, Italy, Spain, the U.K., France, Austria, Denmark, the Netherlands, Poland and Ireland have a capital shortage of 776 billion euros ($1.04 trillion) in stress tests that included assigning higher risk weightings to some government bonds, Christian Fischer, a partner and banking analyst at ICV, told reporters in Zurich today. ICV doesn’t see any capital shortage for the eight banks it tested in the U.S. and Canada.
“Banks in Europe haven’t really moved from the spot” compared with last year, Fischer said. “The U.S. addressed the pressing issue, which is capital, whereas in Europe banks just got liquidity in the hope that better times will come at some point. This liquidity wasn’t passed through to the economies but quasi animated the banks to buy more government bonds.”
European banks’ exposure to the sovereign bonds of countries in the region exceeds 1 trillion euros, according to ICV. Banking assets have risen 9 percent between 2007 and 2012, while risk-weighted assets have fallen 6 percent over the same period, suggesting that rather than deleveraging and building capital the banks have simply been replacing some assets with government bonds against which they need to hold less capital, if any at all, according to ICV.
UniCredit, Italy’s biggest bank, owns more than 96 billion euros in European Union government bonds and would need to boost capital by an amount equivalent to almost 17 percent of its market capitalization if it were required to hold reserves against those assets, according to the study.
ICV assigned risk weightings to government bonds similar to those used for corporate debt and using its own ratings for the countries’ creditworthiness. For Intesa and Commerzbank that capital need would amount to 21 percent and 23 percent of their respective market capitalization.
“There has been significantly less improvement in leverage compared to the risk-weighted capital ratios,” Fischer said, adding that banks have also been reluctant to provision for or get rid of non-performing assets. “The banks are sitting on the same non-performing loans that are not being cleaned up because if they were, it would hurt capital.”
Non-performing loans at the 25 banks made up 7.3 percent of total loans in 2012 compared with 6.6 percent in 2011, while only 52 percent of them were covered by provisions last year compared with 57 percent in 2011, ICV said.
Other European banks among the most-susceptible to a stress situation include Banco Popular Espanol SA, Bank of Ireland, Credit Agricole SA and Erste Group Bank AG, according to the study.