Banks From Spain to Italy Massaged Balance Sheets, Moody’s Says

Spanish and Italian banks “massaged” their accounts before European Central Bank officials took snapshots for stress tests in December, according to Moody’s Investors Service.

Spanish banks cut their holdings of government bonds by 22 billion euros ($30 billion), or more than 7 percent, in December, and bought back 23 billion euros of the securities in January, according to aggregate figures compiled by the central bank. Italian banks waited until January to increase their lending to companies, raising it by 24 billion euros, or about 3 percent, after decreasing loans in the previous five months, the figures show.

“The stress tests are driving a lot of bank behavior,” Carlo Mareels, a London-based analyst at Royal Bank of Canada, said in a telephone interview. “That’s especially true in the periphery and for the weaker banks in the core.”

The ECB will use December’s figures in stress tests to be carried out before it takes over supervision of the biggest European lenders later this year. Banks that fail the tests will have to present a plan showing how they intend to rebuild their capital ratios to at least 8 percent of assets weighted by risk, or face penalties.

Loans to non-financial companies account for about 20 percent of Italian banks’ total assets, compared with 10 percent in France and 12 percent in Germany, according to Moody’s.

“The reversal of balance sheet improvements is credit negative,” London-based Moody’s analysts Antonio Garre and Marie Diron wrote in a note today. “It illustrates how banks massaged their balance sheets ahead of the snapshot, which could undermine investor confidence in the reliability of the EU stress tests.”

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