(Corrects paragraph 15 to show Swedbank did provide comment)
* Riskiness of balance sheets falls for two thirds of banks
* Q3 loan loss provisions down year-on-year for most banks
* Regulators to review banks' asset quality as of Dec 31
* Provision coverage for impaired loans barely changed in Q3
* Some experts expect hike in provisions, coverage ratios in
By Laura Noonan
LONDON, Dec 8 Most of Europe's big banks shed
risky assets in the quarter to September, but they have yet to
take extra provisions against doubtful loans to show they have
put the financial crisis behind them in time for a critical
review by regulators.
After reckless lending brought several banks and some
governments to their knees during the global crisis, which is
still playing itself out in a number of euro zone countries,
next year's Asset Quality Review (AQR) by the European Central
Bank will judge whether the banks have done enough to recognise
and provide for losses on their loan books as of Dec. 31.
The results feed into EU-wide stress tests that assess
whether banks need to raise more capital to insulate themselves
against future economic and financial shocks.
A Reuters analysis of the third-quarter results of Europe's
30 largest banks found that almost two thirds of the 27 that
report detailed quarterly figures said their balance sheets were
less risky at the end of September than at the end of June.
Cutting risk means they need less capital.
Assets such as unsecured personal loans, distressed
commercial loans and certain derivatives carry a higher risk
weighting, while government bonds are unweighted.
Swiss bank UBS cut 9 billion Swiss francs ($10
billion) of risk-weighted assets (RWA) in the quarter by exiting
derivatives positions, while Spain's Bankia traded
risky real estate assets with national "bad bank" Sareb for 19.5
billion euros ($26.6 billion) of government-guaranteed bonds.
But almost two thirds of the banks took lower charges for
loan losses in the third quarter than a year earlier, and the
'coverage ratio' - what they set aside for losses relative to
their stock of impaired loans - rose only marginally.
John Paul Crutchley, head of European banks research at UBS,
thought they would have increased provisions, drawing a parallel
with the way U.S. banks position themselves and their balance
sheets before the Federal Reserve's annual review, so the review
won't unearth nasty surprises.
"It's probably because at the Q3 stage there was a complete
unknown about how the ECB was going to conduct these asset
quality reviews (in euro zone countries) and stress tests,"
London-based Crutchley added.
He and Berenberg's London-based banks analyst James Chappell
expect to see more action in the fourth quarter, as banks learn
more about the standards the ECB will apply in the euro zone and
national regulators will apply elsewhere.
At a recent industry event in Brussels, the head of the
ECB's AQR working group, Dutch regulator Anthony Kruizinga, was
asked how banks should prepare their year-end statements if
details of the AQR remain unclear. Banks should be more prudent,
he replied. The DNB and ECB both declined to elaborate.
COVERING ALL BASES
As things stand, coverage ratios vary widely across the EU,
ranging from 94 percent at Commerzbank to below 50
percent at others. The ratios are difficult to compare across
banks since they all use slightly different metrics, but are
expected to be closely examined in the ECB's tests.
Banks were expected to improve the ratios in the run-up to
the tests by taking more provisions, but coverage ratios rose on
average just 3 percent in the year to Sept. 30 among the 22 that
report the data. Nine had lower ratios.
The bank with the biggest drop - Swedbank, down
18.5 percent - said: "The reduction in risk-weighted assets is
mainly due to positive rating migrations as the asset quality in
our portfolios improves. Also, the loan demand is subdued so
there is no growth to consume capital."
Hot on their heels, Spanish banks BBVA and Bankia
cited factors including the transfer of real estate assets to
Sareb, and changes mandated by their local regulator.
Stephen Smith, London-based head of transaction services at
KPMG, said banks could also increase provisions in the fourth
quarter if they believe another part of the ECB review - the
Supervisory Risk Assessment (SRA) - might force them to give up
on some types of assets, as portfolios in wind-down attract
Smith noted that banks' low margins and the 600 billion euro
funding gap being filled by the ECB's long-term refinancing
operation (LTRO), which provides cheap loans to banks, might
suggest some banks don't have a viable mix of assets.
"If you're doing a Supervisory Risk Assessment asking
yourself whether or not you've got a sustainable business model
here, you can imagine the ECB would conclude that there's quite
a lot of work to do," he said.
While banks are generally encouraged to take a prudent
approach to assessing asset risk, global supervisors from the
Basel Committee to the Bank of England have remarked upon the
vagaries of RWAs and the scope for banks to manipulate them.
The ECB's head of financial stability Ignazio Angeloni told
reporters the AQR could change a bank's overall RWA density -
the relationship between total assets and RWAs - by moving loans
from one risk category to another within a bank's own model.
In the third quarter, 16 of 27 European banks that give
detailed quarterly reports had lower RWA density than a year
"Given the impact of riskier assets on RWA calculations,
there is an incentive for banks to de-risk ahead of the AQR and
stress test," said Jonathan McMahon, a partner at Mazars and a
senior financial regulator in Ireland until 2012.
The banks with the biggest falls in RWA density cited
changes in the make-up of their portfolios and denied that they
were vulnerable to having their risk weightings forced up by
RWAs' role in the stress tests, which are being run by the
European Banking Authority (EBA) across all 28 EU countries, is
unclear. There have been talks about 'benchmarking' for RWA
treatments to show how banks compare, putting pressure on those
furthest from the norm. The EBA declined to comment.
"No-one's going to do anything until they've seen the actual
details of what's going to happen in that review," said
The bluntest tool banks have to avoid capital shortfalls
based on their year-end position is to raise more capital before
then, but Chappell doesn't expect that.
"If you're going to do it you're going to announce it as
part of your results, because then you've got the full 2013
results for investors to look at," he said.
($1 = 0.8982 Swiss francs)
($1 = 0.7323 euros)
(Additional reporting by Himanshu Ojha; Editing by Will