Europe's Largest Banks Get Stamp Of Approval Under EU Tests

By Margot Patrick Of DOW JONES NEWSWIRES LONDON (Dow Jones)--Europe's largest banks easily passed the European Union's keenly awaited stress tests Friday, though seven smaller, unlisted banks failed to meet at least some of the measures in an exercise EU authorities said assessed the sector's resilience but "should be interpreted with caution." U.S. stock markets were largely unchanged after the results, which were released after the session closed in Europe. The cost of insuring most European banks' debt against default fell slightly. Analysts said a first glance at the details of the tests, measuring 91 banks' performance under three economic and market scenarios, gave a positive view of the sector but might not go far enough for some investors who continue to worry about the affect on banks of a possible sovereign failure. The tests were criticized in the leadup to their release for not being stringent enough, since they don't address the possibility of default by a European country, and may not be seen as sufficient to encourage banks to loosen their lending to each other. Europe's largest listed banks by assets, including the U.K.'s Royal Bank of Scotland Group PLC (RBS), Barclays PLC (BCS) and HSBC Holdings PLC (HBC), France's BNP Paribas SA and Credit Agricole SA, Germany's Deutsche Bank AG (DB) and Spain's Banco Santander SA (STD), said they had plenty of breathing room in their Tier 1 capital ratios to handle even the worst of the EU's scenarios, consisting of the economy shrinking--contrary to most economists' expectations--in the next 18 months, and a sharp rise in short-term interest rates and one-year government bond yields. However, seven small banks, consisting of Germany's Hypo Real Estate Holding AG, Greece's 77% state-owned ATEBank (ATE.AT), nationalized Spanish savings bank CajaSur and four other small Spanish savings banks failed to pass the worst-case scenario. All of the banks are under state control. "It's not a surprise these banks failed. The low number out of the 91 could lead the market to question if the tests were strong enough, but maybe the reality is that after all these recapitalizations, rights issues and government bailouts, things are not as bad as people thought," said Peter Lenardos, a financials analyst at Arden Partners. "We have pumped hundreds of billions of euros into the system--it should be in good shape." Gary Jenkins, head of fixed-income research at Evolution Securities, said he expects the stress tests will be forgotten within a week as investors turn their focus to earnings season and economic data, but that banks still have to sort out their funding problems. Worries over the health of the region's banks, particularly those exposed to Greece, Portugal and Spain, have dogged the sector and made it more difficult and costly for banks to raise funding in recent months. The cost of borrowing euros in the interbank market rose to 0.885% Friday, an 11-month high. Santander, the largest euro-zone bank by market value, said its Tier 1 ratio would remain at 10% in the worst-case scenario of the tests, the same as it was at the end of 2009. Deutsche Bank put its at 9.7% in a shock, from 12.6% at the end of 2009; while HSBC's would be 10.2%; and 83%-state owned RBS' would drop to 11.2% from 14.4%. France's three largest listed banks by market size and assets, BNP Paribas SA (BNP.FR), Societe Generale SA (GLE.FR) and Credit Agricole (CS.FR), all said their tier 1 capital would be 9% or more in the sharpest measure of economic and market shock. The Netherlands' largest listed bank, ING Bank NV (ING), said its Tier 1 ratio would drop to 8.84% in the worst case, from 10.23% at the end of 2009. Italy's UniCredit SpA (UCG.MI) would be on the lower side of the region's major banks in a case of severe shock, at 7.8%, though still comfortably above the EU's minimum accepted level of 6% under the tests. The 6% level is the same number used by the U.S. in sector-wide stress tests last year and has become a widely accepted indicator of banks' financial resilience. The current EU regulatory requirement is 4%. Tier 1 ratios measure banks' capital adequacy, setting equity, preferred shares and retained earnings against loans and other risk-weighted assets. Barclays' ratio would be 13.7% in the worst-case scenario and 41%-state owned Lloyds Banking Group PLC's (LYG) would be 9.2%. Swiss banks UBS AG (UBS) and Credit Suisse Group (CS) don't fall under the EU tests, but Swiss regulators said both banks would have Tier 1 ratios above 8% in the event of further shocks to the economy and financial markets. The STOXX Europe (600) index of banking shares closed up 0.2% Friday. The index is down about 10% since mid-April. Analysts at Keefe, Bruyette & Woods Ltd. this week shows that European bank shares are down 23% relative to U.S. banks so far this year. The tests were carried out by the EU's Committee of European Banking to examine the banks' balance sheets, compliance with capital rules and how their holdings in sovereign debt of 30 European countries would affect them in certain scenarios. They encompassed banks' forecasts for 2010 and 2011 net operating income, loan impairments and dividend payouts. CEBS on Friday said the scenarios it tested are "what-if" situations reflecting extreme assumptions and shouldn't be taken as forecasts of expected outcomes. The EU has effectively said it won't allow a member state to fail, providing a backstop against an even worse-case scenario that some investors still fear. -By Margot Patrick, Dow Jones Newswires; +44 (0)20 7842 9451; margot.patrick@dowjones.com (END) Dow Jones Newswires July 23, 2010 13:38 ET (17:38 GMT)