November 2, 2018 / 12:04 AM / 12 days ago

Europe's top banks in EU stress test spotlight

* EBA stress test results due at 1700 GMT Friday

* Banks in better shape going into latest test

* Focus on how Italian banks cope with scenarios

By Huw Jones

LONDON, Nov 2 (Reuters) - Europe’s top banks will learn on Friday how they have fared in their latest stress test, which could require some to raise capital or shed assets, with Italian lenders expected to come under close scrutiny.

The European Banking Authority (EBA), the European Union’s banking watchdog, is due to publish the results of 48 banks at 1700 GMT, in what is being touted as its toughest test since the exercise began in 2009.

While there is no pass/fail mark, supervisors will determine how much capital lenders should be holding or which risky assets should be sold. As well as the Italian banks, analysts expect Deutsche Bank, Germany’s biggest lender, to be closely watched after three years of losses.

The health check was implemented to identify any capital holes and avoid government bailouts like those during the financial crisis.

This time the tests measure banks’ ability to withstand theoretical market shocks like a rise in political uncertainty against a backdrop of falling economic growth, a disorderly Brexit or a sell-off in government bonds and property.

Investors will focus on how much core capital banks hold against a 5.5 percent level under the most “adverse” scenario.

While no bank is expected to fall below this mark, those that are seen as too close may come under market pressure.

EUROPE LAGS

Europe’s banks still lag U.S. counterparts in profitability, quality of loans and cost discipline and the region’s banking index has lost more than 20 percent this year.

Thirty-three of the banks in the test are in the euro zone, where the main supervisor is the European Central Bank, which is separately testing a further 60 smaller banks. Some of these are struggling, but their results will not be published.

The results could heighten concerns over Italy’s banks, which have come under pressure because of a drop in the value of their large holdings of Italian debt. Banco BPM’s results are being closely monitored because its capital buffer is lower than rivals.

Monte dei Paschi performed worst in the last test in 2016 and has since been bailed out by Rome. But along with lenders from Greece and Portugal, it is not included this time.

“I would not expect the extreme results that we saw in 2016 when Monte dei Paschi was such an outlier,” Daniel Quinten, co-head of KPMG’s ECB office in Frankfurt, said.

This year’s EBA test will include a new accounting rule that forces banks to make provisions much earlier for souring loans.

Reporting by Huw Jones; Editing by Alexander Smith

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