Europe’s lenders are running out of time to get their books in order before the European Central Bank passes judgment on them.
As executives from 128 banks meet in Frankfurt this week with some of the officials examining them, managers of the ECB’s Comprehensive Assessment are working out a mid-October date for final disclosure and guiding lenders through a conclusive stress test. Meanwhile institutions including Erste Group Bank AG (EBS) are stepping up efforts to take the sting out of the outcome by acknowledging losses and raising fresh capital.
Aiming to create a clean sheet for the region’s wounded lenders and foster credit to the economy, the ECB is urging them not to wait until the results of its health check are out. As its Asset Quality Review comes to an end this month, a round of quarterly earnings should boost the 104 billion euros ($141 billion) worth of measures cited by the ECB as already taken by banks to strengthen balance sheets.
“The comprehensive assessment is as much about the process as the results,” said Bridget Gandy, managing director for financial institutions at Fitch Ratings Ltd. in London. “It shouldn’t be that you have to wave a stick at the banks and tell them to get the capital in after the results, they should be — and largely are — doing whatever they can now.”
Last week, Erste, the Austrian bank earning most of its income in eastern Europe, said it will post a loss this year of up to 1.6 billion euros as bad-loan provisions rise 40 percent more than forecast. Erste Chief Executive Officer Andreas Treichl said the measures will help the bank pass the ECB’s assessment.
Exposures to economies ravaged by the European debt crisis such as Italy and Spain will force other lenders to set aside cash against soured loans too, according to Cyril Meilland, an analyst at Kepler Cheuvreux.
The second quarter is likely to be “a high mark for provisions,” he said. “We definitely do expect most banks will be booking either gradually larger provisions in connection with the AQR and stress tests, or in response to requirements from the ECB and other supervisors.”
A further challenge to European bank balance sheets is coming from fines and litigation costs. Commerzbank AG (CBK), Germany’s second-largest lender, will probably be the next institution to resolve alleged U.S. sanctions violations, a person with knowledge of the matter said. The probe is part of a U.S. crackdown on financial institutions for handling funds linked to blacklisted nations that led to a record $8.97 billion fine against BNP Paribas SA. (BNP)
Second-quarter earnings from euro-zone banks will intensify in the final week of July, as Germany’s largest lender, Deutsche Bank AG (DBK), reports on July 29 followed by BNP Paribas SA and Banco Santander SA (SAN) both on July 31.
Chief financial and risk officers will gather for a three-day series of meetings with ECB officials running the comprehensive assessment, beginning Tuesday. They can expect a run-through of how the central bank plans to disclose the results in October, a process that will include divulging the ECB’s assessment of capital levels according to lenders’ balance sheets as of Dec. 31, 2013.
The ECB’s assessment on any shortfalls that emerge will also include an appraisal of what the bank in question has done to improve its position since the beginning of the year. Banks need to show they hold capital worth 8 percent of risk-weighted assets for the asset review and 5.5 percent for the adverse scenario of the stress test.
So-called technical failures, where a bank fails the test according to its end-2013 balance sheet but passes on the basis of what it has done since then, are a likely outcome, according to Fitch’s Gandy.
“It would be dangerous for financial stability if a lot of institutions which showed up in the results as failures hadn’t done anything since the end of 2013, the date the tests are based on,” she said. “The half-year results are going to be very interesting.”
To give time for the market to digest the information before the central bank takes over supervision on Nov. 4, officials have penciled in a date of Friday, Oct. 17, to disclose the outcome publicly, according to two people familiar with the discussions. That date could still change.
The ECB has not confirmed a date and will do closer to the time, a spokeswoman said in a statement, adding that officials have pointed to publication in the second half of October.
To get there, the ECB still has to process what could be the most technically demanding part of the Comprehensive Assessment. Data gleaned from the AQR — which involves 6,000 auditors sifting through about 160,000 credit files across the euro area — must be combined with banks’ estimates of losses under the adverse scenario of the stress test, all without revealing too much about the ECB’s appraisal of a lender’s balance sheet before disclosure day.
While such uncertainty persists for banks, they might as well seize the initiative and put more money aside early for unrealized losses, said Andreas Plaesier, an analyst at M.M. Warburg in Hamburg.
“If you revalue things now and increase capital early, it’s more positive than waiting until later, when everything’s public and you have to react,” he said. “I could also imagine that capital increases remain a topic before the stress test results come out.” [Bloomberg]