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European Banks: Stress Test Results to Catalyse Dividend Distributions and Buybacks

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European Banks: Stress Test Results to Catalyse Dividend Distributions and Buybacks 26 July 2021 Financial Institutions European banks: stress test results to catalyse dividend Europeandistributions banks: sandtress buybacks test results to catalyse dividend distributions and buybacks On Friday July 30 at 6pm CET, the European Banking Authority will announce the results of its EU-wide stress test. We believe the announcement will be an Analyst important milestone for European banks, potentially setting off a normalisation of distribution policies and M&A activity. Marco Troiano, CFA [email protected] The target variable for the stress test is the CET1 ratio, measured on a transitional basis. Other prudential metrics (Tier 1 capital ratio, Total capital ratio, Leverage ratio) are also Team Leader calculated and disclosed. There are no explicit pass/fail thresholds, but the results will Dierk Brandenburg feed into the 2021 Supervisory Review and Evaluation Process (SREP). [email protected] Specifically, the depletion of CET1 under the adverse scenario will be used as a starting point to position each bank in a bucket with a target range for Pillar 2 Guidance (P2G). In Media a second step, the Joint Supervisory Teams will adjust the P2G, within the range Keith Mullin [email protected] determined by the stress test results. While the cumulative decline in GDP in the adverse scenario (-3.6% in three years) may not look too severe, we believe it is a reasonable Related Research stress given the depressed starting point (end-2020) and current growth expectations. European Banking Update. In our view, the results of the stress test will help to dissipate some of the remaining Revisiting the pre-Covid uncertainty around European banks’ capital positions. It is possible and even desirable narrative: back to the old normal for the exercise to highlight problematic situations, but we expect these to be few and far July 2021 between. The majority of institutions will likely come out strong – mostly a result of strong Asset-quality Quarterly: brighter starting-point balance sheets. prospects for European banks As has been the case in previous stress tests, the exercise will also provide the market July 2021 with valuable data on European banks and their risk exposures on a comparable basis, AT1 Quarterly: normalisation allowing investors to rank them relative to their own concerns. begins; EBA stands firm on ESG Equity investors will gain better visibility on the amount (if any) of excess economic capital instruments capital in the different institutions and raise their demands for this to be returned. With July 2021 moratorium programmes gradually expiring in Europe, supervisory validation of solvency positions under an adverse stress scenario and a relative lack of opportunities to profitably deploy capital, the arguments for earnings retention are limited. Andrea Enria, Chair of the ECB Supervisory Board, confirmed in the hearing at the European Parliament Economic and Monetary Affairs committee that the supervisory arm of the central bank is ready to repeal the recommendation to limit dividends payouts at the end of September 2021 and return to a normal (i.e. case by case) supervision of capital planning and distribution policies. Several bank CEOs have already announced that they intend to boost payout ratios We highlight that the availability of excess capital in a mature sector characterised by low profitability and below book valuations may raise the risk of hostile takeovers. Figure 1: How stress test results feed into the SREP process Scope Ratings GmbH Lennéstraße 5 D-10785 Berlin Phone +49 30 27891 0 Fax +49 30 27891 100 [email protected] www.scoperatings.com Source: ECB, Scope ratings Bloomberg: RESP SCOP 26 July 2021 1/4 European banks: stress test results to catalyse dividend distributions and buybacks EU-wide stress test 2021 The EBA/ECB EU-wide stress test will cover a sample of 50 banks, including 38 under the SSM’s jurisdiction – roughly 70% of EU/EA banking assets. Scope In parallel, the ECB will conduct its own stress test for another 53 banks it directly supervises but that are not included in the EBA-led stress test sample, based on the same methodology and scenario though adapted to the lower size and complexity of these banks. Timeline Based on year-end 2020 figures, scenarios applied through 2023 (three years) Results significance No pass/fail hurdle rates but results used as input to SREP. Key risks stressed Credit risk, Market Risk, Operational Risk Key assumptions Static balance sheet, business mix, no growth, no policy changes. The baseline scenario is essentially the state of the world, including expectations, as of December 2020. December 2020 projections by the national central banks (for EU countries) or by the IMF (for Baseline Scenario non-EU countries) are used as baseline forecasts. For the EU and the Euro Area, GDP was projected to grow just above 10% over the 2021-2023 period. Since the scenarios were published, consensus forecasts have drifted upwards, with most forecasters now expecting a stronger recovery. Ongoing concerns about the possible evolution of the Covid-19 pandemic and its economic ramifications trigger adverse confidence effects worldwide and prolong the economic contraction. EU GDP contracts by a cumulative 3.6% in 2021-2023, unemployment rises by 4.7 percentage Adverse Scenario1 points, average house prices decline by 16.1%, CRE prices fall by 31.2%. In the scenario, there is an abrupt repricing of European equities (-50% in Year 1) and credit, with corporate and financials credit spreads more than doubling and significant spike in government bond yields for all but the safest sovereigns. 1 for a more detailed view of the scenarios and assumption behind the stress test, see https://www.esrb.europa.eu/mppa/stress/shared/pdf/esrb.stress_test210120~0879635930.en.pdf?a0c454e009cf7fe306d52d4f35714b9f 26 July 2021 2/4 European banks: stress test results to catalyse dividend distributions and buybacks EU-wide sample Erste Group Bank AG Bank of Ireland Group plc Raiffeisen Bank International AG Banco BPM S.p.A. Belfius Banque SA Banca Monte dei Paschi di Siena S.p.A. KBC Group NV Intesa Sanpaolo S.p.A Bayerische Landesbank Mediobanca – Banca di Credito Finanziario S.p.A. Commerzbank Aktiengesellschaft UniCredit S.p.a. Deutsche Bank AG ABN AMRO Bank N.V DZ BANK AG Deutsche Zentral-Genossenschaftsbank BNG Bank N.V. Landesbank Baden-Württemberg Coöperatieve Rabobank U.A Landesbank Hessen-Thüringen Girozentrale ING Groep N.V. Volkswagen Bank Nederlandse Waterschapsbank N.V. Banco Bilbao Vizcaya Argentaria S.A. Banco Comercial Português, SA Banco de Sabadell S.A. Caixa Geral de Depósitos, SA Banco Santander S.A. Danske Bank Bankinter, S.A.. Jyske Bank Nordea Bank Abp Nykredit Realkredit OP Osuuskunta OTP Bank Nyrt BNP Paribas DNB Bank Group Confédération Nationale du Crédit Mutuel Bank Polska Kasa Opieki SA Groupe BPCE Powszechna Kasa Oszczednosci Bank Polski SA Groupe Crédit Agricole Länförsäkringar Bank AB (publ) HSBC Continental Europe SBAB Bank AB – group La Banque Postale Skandinaviska Enskilda Banken — group Société Générale S.A Svenska Handelsbanken — group AIB Group plc Swedbank — group 26 July 2021 3/4 European banks: stress test results to catalyse dividend distributions and buybacks Scope Ratings GmbH Headquarters Berlin Frankfurt am Main Paris Lennéstraße 5 Neue Mainzer Straße 66-68 23 Boulevard des Capucines D-10785 Berlin D-60311 Frankfurt am Main F-75002 Paris Phone +49 30 27891 0 Phone +49 69 66 77 389 0 Phone +33 1 8288 5557 Oslo Madrid Milan Karenslyst allé 53 Edificio Torre Europa Via Nino Bixio, 31 N-0279 Oslo Paseo de la Castellana 95 20129 Milano MI E-28046 Madrid Phone +47 21 62 31 42 Phone +39 02 30315 814 Phone +34 914 186 973 Scope Ratings UK Limited 111 Buckingham Palace Road London SW1W 0SR Phone +44 (0)20 7340 6347 [email protected] www.scoperatings.com Disclaimer © 2021 Scope SE & Co. KGaA and all its subsidiaries including Scope Ratings GmbH, Scope Ratings UK Limited, Scope Analysis GmbH, Scope Investor Services GmbH, and Scope ESG Analysis GmbH (collectively, Scope). All rights reserved. The information and data supporting Scope’s ratings, rating reports, rating opinions and related research and credit opinions originate from sources Scope considers to be reliable and accurate. Scope does not, however, independently verify the reliability and accuracy of the information and data. Scope’s ratings, rating reports, rating opinions, or related research and credit opinions are provided ‘as is’ without any representation or warranty of any kind. In no circumstance shall Scope or its directors, officers, employees and other representatives be liable to any party for any direct, indirect, incidental or other damages, expenses of any kind, or losses arising from any use of Scope’s ratings, rating reports, rating opinions, related research or credit opinions. Ratings and other related credit opinions issued by Scope are, and have to be viewed by any party as, opinions on relative credit risk and not a statement of fact or recommendation to purchase, hold or sell securities. Past performance does not necessarily predict future results. Any report issued by Scope is not a prospectus or similar document related to a debt security or issuing entity. Scope issues credit ratings and related research and opinions with the understanding and expectation that parties using them will assess independently the suitability of each security for investment or transaction purposes. Scope’s credit ratings address relative credit risk, they do not address other risks such as market, liquidity, legal, or volatility. The information and data included herein is protected by copyright and other laws. To reproduce, transmit, transfer, disseminate, translate, resell, or store for subsequent use for any such purpose the information and data contained herein, contact Scope Ratings GmbH at Lennéstraße 5 D-10785 Berlin. 26 July 2021 4/4 .
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