Analysts are down to their last gasps of stress-test commentary before we finally get the official results on Friday. Credit Suisse had a useful contribution on Thursday, tackling the queasy ‘everyone’s a winner!’ hints that politicians have been dropping.
Basically — we should hope so, given the bailouts already in the system.
Here’s a helpful Credit Suisse summary of said bailouts:
■ The Greek banks have raised €9.4bn via government injection, convertibles and rights issues in the last 18 months or so.
■ Irish banks are likely to pass the stress test because the stress test is likely to take into account the capital raising planned/completed (€2.9bn for Bank of Ireland and €7.4bn for AIB…)
■ The Spanish government has indicated that the financial aid to the Spanish banking industry won’t exceed €22bn, but already €12bn has been committed and funded by the FROB. This €12bn should help some of the players avoid failing the stress test.
■ Concerning the Spanish Cajas the stress results will be released at the group level after (and not before) the recently announced mergers including BBK and Cajasur. For example, when talking about Cajamadrid (future name of merged group not yet decided) the results will reflect the combined solvency position of the seven institutions that form the new group (Cajamadrid, Bancaja and five others). The solvency position of the institutions will already include the €5bn capital injections committed by the FROB. It is conceivable that some of these entities may have failed the stress test if it had been conducted pre-merger. Finally the mergers are a way to transfer capital from the stronger to the weaker players, thus also contributing to supporting entities which might otherwise have failed.
■ HSH Nordbank has a “risk shield”, guaranteeing losses up to €10bn on a €172bn portfolio of its assets, subject to a €3.2bn first loss tranche which has partly been consumed. WestLB has a similar deal for an amount of €5bn.
■ Hypo Real Estate is in the process of transferring up to €210bn of its assets into a “bad bank”. They would likely be deemed as failing pre transfer but passing the test post the transfer,
Without listing exhaustively all the schemes it becomes clear that already €50bn+ of funds has been provided to a number of institutions that would arguably otherwise have failed.
Plus a good €220bn of capital-raising by European banks since the US stress tests back in May 2009, according to Credit Suisse’s estimates.
So everyone can be a winner and retain credibility, since banks were made to get plastic surgery before the stress-testers smashed their faces in.
Well-played, European regulators. Well-played.
Meanwhile, Unicredit’s Marco Annunziata is less enthusiastic, starting with this ironic observation (emphasis ours):
Perhaps never before has such a major transparency effort been prepared and launched with such secrecy. With less than twenty-four hours to go before the publication of the stress tests results, we know very little about the assumptions and methodology. Even worse, in the last few days there have been concerns that the results might not be easily comparable across countries, partly because of heterogeneous assumptions on government bonds—the very concern that forced the publication of the stress tests in the first place.
As the whole purpose of the exercise is to increase transparency and bolster confidence, we have definitely started on the wrong foot. The only thing that has been strengthened so far is the impression that the Eurozone is plagued by a lack of coordination that risks undermining even the best intentions, and that national interests continue to trump the common good.
The silver lining however is that this should have served as pragmatic expectation management: very few investors now expect the European stress tests to provide a silver bullet or to even approximate the positive impact that the US stress tests had a year ago. The scope for disappointment should therefore have been reduced.
Realistically, it will take some time for the market to absorb and process the information, given that we will have one release by the Committee of European Banking Supervisors (CEBS) followed by individual national releases. Depending on the extent (if any) to which assumptions and methodologies differ across countries, and on the extent to which the level of details released differs across countries, it might require quite a bit of work to figure out the implications for the different banking systems and the Eurozone financial sector as a whole…
Oh, we can’t take much more of this.
Related links:
Stress-test rumours and reality – FT Alphaville
Some stressful reading for the CEBS – FT Alphaville