EBA stress tests highlight weaknesses in some lenders and bank systems, S&P says

European regulators´ bank stress-test results showed that most of them had sufficient capital to withstand an adverse scenario, one of the world´s main credit rating agencies said.

However, the results of the EBA´s tests also highlighted "potential weaknesses" in some banks and banking systems, Standard&Poor´s said.

Furthermore, going forward the regulator could be expected to increaasingly focus on the sustainability of lenders´ business models and earnings given the low likelihood for a continued low interest rate environment.

"Combined with proposed changes in Basel rules, we believe the stress-test results and likely regulatory responses to the results support our assumptions of further steady capital strengthening across EU banks, albeit at a slower pace than in the past. We also continue to expect increasing focus by supervisors on the sustainability of banks' business models and their earnings capacity, given the prospect of a prolonged period of low interest rates in the EU," S&P said in a report.

The European Banking Authority´s examination of 51 European Union lenders reflected the progress made in recent years to adress capital weakness, S&P also said.

Combined, the lenders under scrutiny accounted for 70% of the EU´s banking assets.

Since the end of 2013, until the end of 2015, they had increased their common equity Tier-one (CET-1) ratio by approximately €180bn, the tests showed.

Under the 'adverse' scenario envisioned by the regulator, eleven of the institutions that were placed under the microscope had fully-loaded CET1 ratios below 8.0% in 2018.

That included British lenders Barclays and Royal Bank of Scotland and Irish peers Allied Irish Bank and Bank of Ireland. The latter two were "particularly affected by the static balance sheet assumption of the stress test".

Spain´s Banco Popular, CaixaBank and Sabadell were also in the same group, as were Germany´s Commerzbank and Deutsche Bank.

So too were Italy´s Banca Monte dei Paschi di Siena and UniCredit.

S&P said it did not anticipate any immediate rating actions as a consequence of the stress test results.

Its analysts also noted how the EBA had repeatedly emphasised that the stress would be incorporated in its regulatory Pillar 2 guidance for individual banks.

That would limit any potential automatic impact on the risk of deferral of coupons on hybrid instruments, S&P said.

But an afterthought: No major accidents. No major surprises?

The results of the EBA tests released after the close of trading in London on Friday drew but a yawn from analysts at SocGen, for whom the main event of the session was the announcement of the recapitalisation of Monte dei Paschi di Siena.

Indeed, in the opinion of the broker the remaining r50 banks performed "fine (to varying degrees)".

"The main event was the recapitalisation and rescue of Monte (MPS), announced mere minutes before the publication of the EBA/ECB stress test. One bank performed quite miserably, Monte (MPS) of course, and the other 50 banks performed fine (to varying degrees). With a Monte rescue in place, the stress test itself is something of an afterthought. No major accidents. No major surprises."

AIB´s privatisation to be postponed?

"[...] There are still significant problems in some countries’ banking sectors, most notably Italy’s. These issues will not be resolved quickly, so several banks will remain vulnerable to more severe losses of investor and depositor confidence than seen this year," Jack Allen, European economist at Capital Economics said in a research report sent to clients.

"As a result, bank lending in these countries is likely to remain subdued," he added.

Allen further said that Irish and Italian lenders "stood out". Under the EBA´s "pretty pessimistic" adverse scenario Italian banks´ average CET1 ratio came in at 6.5% and that for Irish ones at just 5.2%.

The latter was less than 5.5% threshold used in the 2014 series of the tests, which forced those banks that failed the test to put forward plans to butress their balance sheets.

"It has been suggested that the Irish government might now delay the privatisation of Allied Irish Bank (AIB), which had been planned for early 2017," he added.