Banks boost equity, loan provisions in H1 ahead of ECB tests Banks boost equity, loan provisions in H1 ahead of ECB tests Data compiled by Reuters shows the 20 listed banks increased equity by 4 percent, or 26 billion euros ($33 billion), in the period and put a similar amount into loan loss provisions ahead of the ECB ruling on whether banks must raise cash, or revalue assets. But vulnerabilities remain. The data shows banks have not taken provisions for bad loans worth about a third of equity. This means there could be a profound impact on banks capital if the ultimate loss on these loans is higher than banks expect -- because the value of their loan collateral has fallen. The ECBs landmark review of the euro zones 131 most important banks is designed to banish lingering doubts about whether lenders value assets properly and are strong enough to withstand another recession or financial meltdown. Previous stress tests have faced criticism for not making banks raise significant amounts of capital, or take drastic action. The ECB wants these tests to be judged not only on what banks must do at the end, but on what they did in the run up. The results are due at on Oct. 26 and analysts say these top 20 listed banks, the lenders most closely watched by investors, may have to do more to recognize their bad loans. Major euro-area banks have strengthened balance sheets including some 20 billion euros of one-off provisions (for loan losses) since mid-2013, said Kinner Lakhani of Citis European banking research team. However, we still expect the ECB to further shift the goalposts. RACE FOR EQUITY Spurred on by buoyant equity markets and hints from regulators wanting to avoid a chaotic scramble for capital after the tests, banks have been raising and hoarding equity since the ECBs health checks were first billed more than a year ago. Only five of the 20 banks saw a fall in equity in the first half, and the drop was only significant for one, BNP Paribas (PA:BNPP). The French banks equity dipped 6.5 billion euros, or about 7 percent of its total equity, after an $8.8 billion fine for U.S. sanctions breaches. The equity increases were aided by after tax profits of 11.3 billion euros across the group of lenders, even though profits were down 7 billion euros from the same period a year earlier -- largely because of the one-off hit at BNP Paribas. The stress tests are based on banks positions at the end of 2013, but any new equity accumulated since then can be offset against the ECBs capital demands. This means some banks could have solved any problem before it is even pointed out. There will be banks (that) fail but the point is not really how many banks fail, said Andrea Enria, head of the European Banking Authority, which is coordinating the stress tests. The point is to understand how much adjustment has been made, how much this process has really changed the system, he said on the sidelines of a Sept. 30 conference. FACING UP TO LOSSES Equity increases have been the most public part of banks evasive action ahead of the ECB tests, but the shift in the way they recognize and treat bad loans has been just as significant. The Reuters data shows the level of bad loans recognized by the 20 banks rose was stable at just over 500 billion euros. But banks took an extra 26 billion euros of provisions for losses on those loans, even though the euro zones economy strengthened. Troubled loans now account for 11.1 percent of banks total loans. Greeces Piraeus (AT:BOPr) has the highest proportion of bad loans, accounting for 38.5 percent of total loans, ahead of National Bank of Greece (AT:NBGr) on 23.2 percent. (The ECB) is taking away optionality and flexibility from banks and forcing banks to come clean, said Neil Williamson, of Aberdeen Asset Managements credit research team. But in the case of Piraeus and Bank of Ireland (I:BKIR) bad loans not covered by provisions still exceeded equity. Both banks declined to comment. Williamson said the level of provisions relative to bad loans, and bad loan recognition alone, do not reveal the true state of banks finances. He said the ECB could still force changes so banks take account of what their loan collateral is really worth in practice. The question mark is the value of collateral, he said. If its housing stock in a liquid market, then its relatively okay, if its Greek real estate ... or big ticket items like 200 million euros to 300 million euros loans to property developers in markets where property isnt turning over, (its less so). Citis Lakhani agreed. Our main concern relates to collateral values where the ECB could take a more conservative approach, he said. The extent to which we see AQR (asset quality review) adjustments could reset views on banks and the sector as a whole. bit.ly/1oEXut1
Posted on: Thu, 02 Oct 2014 17:49:52 +0000
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