Stress tests show German and Italian banks outperforming UK lenders

EPA-EFE/MAURITZ ANTIN

The building of European Banking Authority (EBA) is reflected on the surface of euro symbol in Frankfurt am Main, Germany, 19 April 2018.

Stress tests show German and Italian banks outperforming UK lenders


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With observers having a particularly keen eye on banks in Italy due to their two-year struggle and ongoing uncertainty after the country’s draft budget for 2019 was rejected by the European Commission, both the European Banking Authority (EBA) in London and the European Central Bank (ECB) in Frankfurt have assessed how 48 lenders from 14 countries around the EU and Norway are performing.

Banks were put under the microscope from January to October 2019, 37 of which are directly overseen by the ECB’s banking supervision arm. More than half of institutions, 70%, are located within the common market and account for some 70% of bank assets across the Eurozone. The list of financial institutions includes eight German banks, six French lenders, and four each from Italy and the UK.

Among the German lenders is the country’s biggest lender, Deutsche Bank, whose legal issues over allegations that it was tied to money laundering schemes have dogged the bank in recent months.

Deutsche Bank’s key measure of financial strength fell, placing it in the lower half of the banks measured by the test. NordLB has the weakest balance sheet of any German bank that participated in the stress test and people familiar with the matter said they expected the company’s key capital ratio to fall to 7%, well short of regulatory requirements.

The banks are still struggling to move beyond repairing their businesses while accounting changes to slowing economies in many parts of the world and tight margins amid low-interest rates are problems that should not be left out of consideration.

Although German banks face intense pressure due to the heavy competition, Italy is suffering from the ongoing standoff between the European Commission and its government, Italy was first EU member to have its annual draft budget plan rejected by the Commission.

As a result,  S&P Global Ratings cut its outlook on 11 of the country’s banks, with the worst forecasts for Intense Sanpaolo SpA, Banca IMI SpA, and Mediobanca SpA.

Deutsche Bank and Italian banks outperform UK’s Lloyds and Barclays

Most of Italy’s banks performed better than Lloyds and Barclays during the EU stress test, according to the results published by the European Banking Authority.

Measuring the banks’ ability to withstand hypothetical market shocks as investors grow wary of the difficult climate, the EBA’s test didn’t provide a “pass or fail”, but laid out a score for each financing institution and checked whether they were able to complete the adverse or toughest scenarios without preserving a capital ratio of above 5.5%.

The stress test showed that none of the 48 banks dropped below the 5.5% mark, showing Banco BPM, whose result was 6.67%, is performing better than Barclays, which had a result of 6.37%, while and Lloyds’ was similar at 6.8%.

The EBA marked UK banks down because of their exposure to credit other than secured loans. Barclays said in response to the results that it remained comfortable with a target core capital ratio of around 13%. Lloyds’ response was that its capital levels remained strong and it expects to continue to generate 2 percentage points of additional capital.

Deutsche Bank scored among the 10 worst banks, yet another sign of weakness at Germany’s largest lender, with a core capital ratio of 8.1% for 2020, placing it 40th place of 48 lenders measured, but still better than Barclays and Lloyds.

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