* Top 20 euro zone banks take 71 bln of loan loss provisions
* Profits, capital raises, help boost top 20 banks' capital
* Actions reduce the chances of high-profile failures in ECB
* Market not baying for blood but credibility risk if no
* Banks not out of the woods yet as numbers can be deceptive
(Adds comment from the European Banking Authority)
By Laura Noonan
LONDON, April 15 The tens of billions of euros
euro zone banks set aside for loan losses in their latest annual
accounts may have substantially reduced the chance of
institutions failing ECB stress tests in the next few months.
A total of 71.5 billion euros ($99.3 billion) was set aside
in 2013 by the 20 biggest listed banks involved in the exercise,
a Reuters analysis of their new annual reports shows.
Many also boosted capital ratios by raising cash
and hoarding profits.
If replicated across the 128 lenders subject to tests the
European Central Bank aims to complete by October, it could mean
no bank will fail or be forced to raise large amounts of new
capital. Such limited consequences helped discredit previous
tests by EU financial watchdog the European Banking Authority
(EBA) - one reason the ECB is keen to show that its new exercise
will truly be tough on the region's banks.
While some analysts have suggested that a failure by the ECB
to force the closure of any euro zone bank after its own tests
could again undermine the credibility of the exercise, many see
it as more important that the ECB's scrutiny creates a stronger
banking system - something the data suggest is happening.
"A lot of action has been taken," said Carla Antunes da
Silva, head of European banks research at Credit Suisse. "I
don't think you need to have a day of reckoning where a big bank
needs to fail.
"A few years ago, if you had asked investors what they
wanted to see from stress tests they would have said 'bodies'
-but not any more," she added.
A survey last month of 200 clients of her own bank had, she
said, found very few seeing it as essential to the credibility
of the ECB stress tests that a major bank should fail.
ECB President Mario Draghi himself has highlighted progress
already made since they learned of his plans and said this month
he was "pretty confident" that the testing regime would "find a
stronger banking system than we had before announcing it".
The EBA, which will coordinate this year's stress tests with
the ECB, said investors were interested not just in whether
banks pass or fail but their sensitivity to stress and how
supervisors deal with the results.
"The credibility of the EU-wide stress test rests on
transparency; market participants will determine for themselves
how supervisors and banks are dealing with remaining pockets of
Back in January, analysts at Keefe, Bruyette & Woods
published a report showing 27 of the ECB's 128 banks failing a
simulated stress test, though of these only Commerzbank
was among the top 20 listed entities. The German
lender has said it is "well prepared" for the exercise.
One senior official at a banking regulatory body in Europe
told Reuters that he and his peers would not be concerned if the
ECB review failed to force significant remedial action at major
banks. However, several experts, speaking privately, emphasised
that it could throw up surprises and problems.
One person who has been involved in bank tests before said
large provisions already taken by banks do not mean they are out
of the woods. One indicator of that was the ratio to equity of
bad loans against which provisions have yet to be made.
Reuters analysis shows non-performing loans not covered by
provisions make up about a third of the equity across the 20
banks. In the cases of three banks, however, bad debts not
provided for exceeded their total equity. If those banks'
collateral were to prove worthless and no repayments were made
on the loans, those banks' equity would be entirely wiped out.
That would be an extreme outcome, however.
Nonetheless, such issues highlight uncertainties in the
process. Karl Whelan of University College Dublin, who advises
the European parliament's economics committee, said: "There's no
doubt that banks have been building up their capital ratios.
"But these ratios often hide a lot."
The core tier 1 ratio, a key measure of financial strength,
rose to an average of 11.85 percent at end-December across the
20 banks whose accounts Reuters analysed - up from an average
10.77 percent a year earlier. Using a slightly different tool,
the ECB requires banks have a ratio of at least 8 percent.
The 20 banks account for about 60 percent of the
risk-weighted assets held by the 128 banks, and range in size
from Spain's Santander down to those like Bank of
Ireland and Italy's Mediobanca. The group
does not include large banks that do not have listed shares.
The ratios that banks themselves disclosed for 2013 were
nudged higher as the 20 raised more than 16 billion euros in
equity and booked post-tax profits. Excluding a huge 14-billion
euro loss announced by UniCredit of Italy, triggered
by provisions ahead of the ECB tests, the other 19 posted a
total profit of 20 billion euros. Since the turn of the year,
the banks have continued to sell assets and raise capital.
The main wild card in the ECB's tests, and their main
enhancement over the EBA's previous efforts, is an assessment of
whether banks have recognised all their impaired loans and set
aside enough to cover losses. If the ECB concludes the loans are
overvalued, this will push capital ratios down.
The 20 banks examined classed 9.1 percent of their loans as
non-performing at the end of 2013, against a non-performing
ratio just below 8 percent a year ago.
The 71.5 billion euros the 20 set aside to deal with loan
losses last year was down 20 percent on provisions they took in
2012, when business was tougher. Collectively, they have now
taken enough provisions to cover losing 55 percent of their bad
However, much remains obscure in the detail of how banks
state their non-performing loans, or NPLs: "It's ... very hard
to assess provisioning data, given the differences across
countries and banks in their approaches to classifying and
accounting for NPLs," said Karl Whelan in Dublin.
Those uncertainties notwithstanding, investors have piled
back into the equity and debt of banks with the highest NPL
ratios, with Italian and Spanish banks leading share price gains
among European banks and National Bank of Greece making its
return to the bond market.
"This hunt for yield has made people say 'we really do think
the worst is behind us'," said Edmund Shing, a London-based
portfolio manager with BCS Asset Management, noting a new
willingness to buy relatively risky assets.
Ian Robinson, head of credit at asset manager F&C, said:
"Most people are comfortable that Europe's household banks have
taken the primary steps necessary to clean their balance sheet
by writing down NPLs and raising capital.
"But the smaller banks may prove a bigger problem."
($1 = 0.7201 euros)
(Additional reporting by Aimee Donnellan in London; Editing by
Alastair Macdonald and Will Waterman)