The European Banking Authority (EBA, in its acronym in English) has presented this Friday the results of the stress tests to the 50 main banks in the euro zone after they were not carried out last year due to the pandemic. This year’s review has subjected banks to a particularly adverse scenario, with the COVID crisis continuing until 2023, in order to assess whether they have enough capital to withstand a hypothetical context of prolonged recession.
The large banks analyzed account for 70% of all assets in the euro zone, and among them there are four Spaniards: Santander, BBVA, Sabadell and Bankinter. All have passed the stress test in all adverse scenarios. But the first three have presented CET 1 capital levels fully loaded, the highest quality, below 10% in the most stressed economic scenario in the three years, 2021, 2022 and 2023. It is not the first time that the EBA warns of the low level of capital of Spanish entities, since in 2020 they also appeared in a report with this situation.
The Bank of Spain, through a note, stated: “The Spanish banking groups that have participated in both exercises show resistance, with satisfactory capital levels in the adverse scenario, despite the greater severity of this scenario.” A total of 10 European banks are in the same situation as the Spanish, although there are 17 that have at least two years with capital below 10%.
Among the Spanish, Sabadell has been the most punished, since it was the weakest entity due to the problems that it dragged in 2019 and 2020, which led it to try a merger with BBVA. There are only two entities with worse ratios than this entity, the Italian Monte Dei Paschi, which even ends without capital in 2023, and the European division of HSBC. The entity led by César González-Bueno has been left with 7.45%, 6.89% and 6.54% in 2021, 2022 and 2023 respectively. However, the bank has been authorized to distribute dividends out of 2021. The big Germans, Deutsche Bank and Commerzbank also have low levels of capital in the event of an economic crisis.
BBVA and Santander, between 8% and 9%
BBVA is the second Spanish with the weakest capital, without taking into account the sale of its subsidiary in the United States, which has greatly strengthened its own resources. Thus, the entity chaired by Carlos Torres presents ratios of 8.79%, 8.71% and 8.69% in 2021, 2022 and 2023 respectively.
Santander reaches better figures, but also below 10%. It has 8.65%, 9.24% and 9.31% in 2021, 2022 and 2023. Finally, Bankinter, with a more comfortable position, is at 11.18%, 11.06% and 11.25 % in the same three years. CaixaBank is not included in the test because its merger has been completed months ago.
The EBA, chaired by the Spaniard José Manuel Campa, concludes that the banks began the exercise with the capital indices called CET 1 “higher in comparison with the previous European stress tests”. He also explains that “the scenario for this year is very severe (and more than that of 2018)” and that the results show a high wear of capital in a scenario of economic crisis, which subtracts about five percentage points, “but banks end up the year above 10% of the CET1 ratio on average ”.
Cajamar, the one that suffers the most and Kutxabank the most solvent
At the same time that the EBA has examined the big banks, the ECB has done it with 51 medium-sized banks in the euro zone. The result is that they show an average decrease in capital of 6.8 percentage points of capital CET 1, the highest quality, and remain at 11.3%, from a starting point of 18.1%, in the scenario adverse.
This wear and tear of equity in a hypothetical crisis is greater than that experienced by large banks. The ECB justifies it because the medium-sized companies suffer more in three items: “The intermediation margin, the net income from commissions and the income from the trading portfolio” in the three years.
Among the Spanish entities, the one that results the worst in the ECB’s examination is Cajamar, since it would remain with a capital level below 8% between 2021, 2022 and 2023 in the adverse scenario. The ECB does not specify the exact rate of decline. On the opposite side is Kutxabank, which remains the most solvent with an average capital of between 11% and 14% in the test. In the middle zone are Ibercaja and Abanca, which remains at a level of 8% to 11%.
Cajamar is not the only middleweight in the euro zone in this situation. A total of 11 more banks also appear below 8% at some point in the test. Among them are some Greeks, HSBC Malta, the Portuguese Novo Banco, the International Bank of Luxembourg and the Italian Banca Carige.
The European Central Bank concludes that the results of the 2021 stress test “show that the euro area banking system is resilient in the face of adverse economic developments. The CET 1 ordinary capital ratio of the 89 credit institutions ”, those examined by the ECB and the EBA, would fall 5.2 percentage points, on average, from 15.1% to 9.9%, if they were exposed to a three-year period of stress marked by adverse macroeconomic conditions. The CET 1 ratio is a fundamental measure of the financial solvency of credit institutions ”. However, the average for large Spanish entities is 8.69%, 1.2 percentage points below the EU average.
A scene of acute crisis
The EBA works in coordination with the European Central Bank and other supervisory bodies to unify criteria and as a data center. The agency says in the report that in these tests the interest margin erodes more than in those of 2018. This margin is what they obtain by lending money less what they pay for deposits. The authority affirms that the results also show dispersion between banks: “Banks more focused on domestic activities or with a lower interest margin show greater depletion.”
As explained by the EBA, two scenarios have been elaborated as hypotheses, one that is based on the projections that the central banks had made in December 2020, more benign and another that seeks to evaluate the consequences of a continued recession between 2020 and 2023. In other words, after the 6.9% drop in GDP in the euro area last year due to the COVID shock, the decline would continue in 2021 (-1.5%), 2022 (-1.9%) and in 2023 (-0.2%). In parallel to this accumulated fall in activity of 3.6% between 2021 and 2023, the unemployment rate would increase by 4.7 percentage points to 12.1% and the share price would plunge 50%.
On this occasion, the results will integrate the impact of possible public support measures to mitigate the effect of the pandemic, such as public guarantees. All of this will serve to assess the capital needs of each entity in the context of the Supervisory Review and Evaluation Process (SREP).