10/46656629_3 1 European Bank Stress Tests and Asset Quality Reviews Overview The European Central Bank (ECB) and the European Banking Authority (EBA) have published the results of the latest stress tests and asset quality reviews (AQR). As foreshadowed from the outset, a number of institutions did not pass the 'unique and rigorous' tests, which were designed to be more severe than in previous EU exercises. The EBA has published the aggregate and individual results of the 2014 EU-wide stress tests of 123 banks, which combined both micro-prudential and macro-prudential aspects. Over the three-year horizon of the exercise, the results showed that 24 banks would fall below the 5.5% Common Equity Tier 1 (CET1) ratio threshold and the overall shortfall would total €24.6 billion. Additional capital raised in 2014 by banks with a shortfall reduces the capital needs of those banks to €9.5 billion and the number of banks with a shortfall to 14. The results are accompanied by some FAQs. The ECB has published its aggregate report on the comprehensive assessment of the 130 largest euro area banks. The ECB's assessment found a capital shortfall of €24.6 billion at 25 banks. The ECB has also published the transcript of the comprehensive assessment press conference (with Q&A) and the presentation slides from the press conference. Of the banks covered by the ECB sample, 103 were also part of the EBA sample. The EU wide stress test was conducted at group level consolidation, excluding subsidiaries of banks from other EU or non-EU countries, but including banking groups from European countries outside the Eurozone (and Norway) • EU banks' CET1 drops by 260 basis points on average - from 11.1% (after the AQR adjustment) to 8.5% after the stress • The joint effect of the AQR and the Stress Tests is a drop of 300 basis points • The main drivers of impact are: o credit risk losses accounting for 440 basis points of CET1 ratio decrease under the adverse scenario o an increase in total risk exposure (110 basis points) • Banks whose capital would fall below 5.5% CET1 ratio under the stress tests were from Italy (9), Greece (3), Cyprus (3), Belgium (2), Slovenia (2), France (1), Germany (1), Ireland (1), Portugal (1) and Austria (1) • Capital shortfall of €24.6 billion detected at 25 participant banks • Banks’ asset values need to be adjusted by €47.5 billion, €37 billion of which did not generate capital shortfall (implies overall impact of €62 billion on banks) • Additional €135.9 billion found in non-performing exposures (NPEs) • Adverse stress scenario would deplete banks’ capital by €262.7 billion, reducing median CET1 ratio by 4% from 12.4% to 8.3% • Banks with capital shortfalls were from Italy (9), Greece (3), Cyprus (3), Belgium (2), Slovenia (2), France (1), Germany (1), Ireland (1), Portugal (1), Austria (1) and Spain (1)10/46656629_3 2 The EBA stress tests Scenario overview The EU-wide stress test is based on a baseline scenario based on the winter forecast extended by one year, and on an adverse macro-economic scenario covering the years 2014 – 2016. The adverse scenario provides forward looking paths for key macroeconomic and financial variables for all EU and a large number of non-EU countries, reflecting those systemic risks assessed as the most relevant threats to the stability of the EU banking sector: • an increase in global bond yields amplified by an abrupt reversal in risk assessment, especially towards emerging market economies; • a further deterioration of credit quality in countries with feeble demand; • stalling policy reforms jeopardising confidence in the sustainability of public finances; and • an increase in banks' funding costs and the lack of necessary bank balance sheet repair to maintain affordable market funding. The negative impact of the shocks, including a stress in the real estate sector, and a foreign exchange shock in Central and Eastern Europe, was substantially global, leading in the EU to: Cumulative deviation of EU GDP from baseline Rise in EU unemployment from baseline 2014 -2.2% 0.6pp 2015 -5.6% 1.9pp 2016 -7.0% 2.9pp For most advanced economies including Japan and the US, the scenario results in a negative response of GDP compared the baseline of between 5% and 6% in cumulative terms. For more detail on the scenario, click here. Basic methodological background The EU wide stress test was conducted on the basis of an assumed static balance sheet – applying a zero growth assumption for both the baseline and adverse scenarios. Business mix and models were assumed as being constant throughout the time horizon. Maturing assets and liabilities were assumed to be replaced with similar instruments, and no work out or replacement of defaulting assets was permitted. Exemptions from the static balance sheet were permitted in respect of mandatory restructuring plans announced before end 2013 (for 26 banks). A group of six banks whose restructuring plans were approved after end 2013 were permitted to produce results based on both static and dynamic balance sheet assumptions. The capital hurdle rates were set at: • 8% CET1 ratio for the baseline scenario; and • 5.5% CET1 ratio for the adverse scenario. Although the definition of capital varies somewhat according to national transitional rules, the EBA has ensured all jurisdictions apply the same rules for unrealised gains/losses on sovereign exposures. The EBA has also disclosed the impact on future fully implemented CRR/CRD IV capital ratios). Although the focus of the exercise remained on credit and market risk, banks were also requested to assess the impact on interest income, including the increase in the cost of funding, over the stress‐ test time horizon. Capital requirements for operational risk were also taken into account with operational risk costs to be included in P&L items, e.g. administrative and other operating expenses, other income and expenses, impairments, or as additional reserves. Realised conduct and litigation 10/46656629_3 3 losses in 2014 were included in a bank‐level disclosure template. In some cases significant additional losses were taken into account in the stress test. Liquidity stress was not included. All results reported are based on the combined effects of stress test and asset quality reviews. More detail on the methodology applied and the definition of stress test metrics are in the EBA's Methodological Note. Results After the asset quality review, 16 banks experienced a shortfall in the baseline scenario against the 8% threshold, all but one of which reported a Common Equity Tier 1 Capital below the threshold in 2013. In total, 24 banks experienced a shortfall in the adverse scenario, including the 16 with a shortfall in the baseline scenario. All banks report the maximum shortfall in the 2016 leading to an aggregate shortfall of €24.2 billion in the adverse scenario and €9.4 billion in the baseline scenario. Two banks report a higher shortfall under the baseline scenario than under the adverse scenario so that the maximum shortfall across both scenarios is €24.6 billion for 24 banks. See the Annex to this note for aggregate shortfall results and a comparison to the ECB's results. The full results can be accessed here. On average, EU banks' CET1 drops by 260 basis points - from 11.1% (after the AQR adjustment) to 8.5% under the adverse scenario. The joint effect of the AQR and the stress tests was a drop of 300 basis points. The main drivers of impact are: • credit risk losses in the form of impairments on financial assets other than instruments designated at fair value through P&L account: o these account for €492 billion of credit losses, including securitisations - 440 basis points of CET1 ratio decrease under the adverse scenario – split fairly evenly between Corporate and Retail exposure; o central banks and central governments accounted for €19 billion of losses; o Italy accounts for the highest share of credit losses, and with the UK, Spain, France and Germany, accounts for more than half of credit losses (the next largest losses are reported for the Netherlands, Brazil, the US and Greece); o cumulative credit losses as a percentage of exposure are particularly material for counterparties in Greece, Ireland, Italy and Brazil (coverage ratios are however broadly similar save for Brazil where coverage of defaulted exposures is above 70%); and • an increase in total risk exposure due to stressed risk parameters (110 basis points). Although account was taken in the stress tests of national transitional arrangements under CRR and CRD IV, the EBA has also disclosed the impact on future fully implemented CRR/CRD IV capital ratios. The additional disclosure is intended to help market participants understand the pathway towards the full implementation of the CRR/CRD IV. For the banks in the sample, the fully loaded CET1 ratio in 2016 under the adverse scenario would be 7.6%. In the adverse scenario, €8.7 billion of €24.2 billion relates to three Greek banks whose restructuring plans were approved by the European Commission after the reference date for the stress test. Whilst assessed based on the static balance sheet assumption under the stress test exercise, those banks also submitted results based on their approved restructuring plans (only one would report a shortfall of €0.02 billion). The ECB comprehensive assessment Scenario overview The ECB's comprehensive assessment examined 130 participating banks with total assets of €22.0 trillion, accounting for 81.6% of total banking assets in the Single Supervisory Mechanism (SSM) (as of 31 December 2013). In general, a bank in an SSM member state was included if any of the following criteria applied:10/46656629_3 4 • the total value of the bank's assets exceeds €30 billion; • the ratio of the bank's total assets to GDP of its country of establishment exceeds 20%, unless the total value of their assets is below €5 billion; or • the institution is among the three largest credit institutions in a participating SSM member state, regardless of size. In addition to the simple application of these criteria, the ECB also took into account changes that might have occurred between the start of the exercise and the commencement of supervision; by applying a 10% margin of deviation to the above thresholds, it included borderline banks in the comprehensive assessment. The assessment consisted of two components: the AQR and the stress test. Basic methodological background The AQR was a point-in-time assessment of the accuracy of the carrying value of banks’ assets as of 31 December 2013; the AQR provided a starting point for the stress test, and was based on the definition of regulatory capital under CRR/CRD IV as of 1 January 2014 (taking into account national transitional arrangements). Under the AQR, banks were required to have a minimum CET1 ratio of 8%. The end result was an indication of the need for additional provisions for losses on exposures on banks' balance sheets, leading to prudently calculated AQR-adjusted capital ratios, which allowed for the meaningful comparison of all participating banks on a like-for-like basis. The stress test provided a forward-looking examination of the resilience of banks’ solvency against separate hypothetical baseline and adverse scenarios, over a three year period from 2014 to the end of 2016, and reflecting new information arising from the AQR. The stress test was undertaken in cooperation with the EBA, which also designed the methodology along with the ECB and the European Systemic Risk Board. Under the baseline scenario, banks were required to maintain a minimum CET1 ratio of 8%; under the adverse scenario, they were required to maintain a minimum CET1 ratio of 5.5%. Further detail on the ECB's methodological approach can be found in the aggregate report. Results The AQR resulted in aggregate gross adjustments of €47.5 billion to participating banks' asset carrying values as of 31 December 2013, originating primarily from accrual accounted assets, particularly adjustments to specific provisions on non-retail exposures. After tax and portfolio guarantee offsets, the aggregate net AQR adjustments were €33.8 billion. NPEs were increased by €135.9 billion. The AQR findings identified a number of accounting breaches and non-compliance with accounting practice. Going forward, the aggregate adjustments will be reflected in the banks' accounts or in supervisory capital requirements. The AQR result was also reflected in the projection of banks' capital adequacy under the hypothetical scenarios performed in the stress test. Under the adverse scenario, the banks' aggregate available capital is projected to be depleted by €215.5 billion (22% of capital held by participating banks) and risk weighted assets (RWAs) to increase by about €860 billion by 2016; including this as a capital requirement at the threshold level brings the total capital depletion to €262.7 billion in the adverse scenario (comprised of €33.8 billion AQR adjustment net of tax offset, €181.7 billion capital depletion from the stress test, and €47.2 billion additional capital required due to the increase in RWAs). This capital impact leads to a decrease of the CET1 ratio for the median participating bank by 4% from 12.4% to 8.3% in 2016. As a broad comparison, although the scenarios are not fully comparable, the median projected CET1 ratio reduction in the Comprehensive Capital Analysis and Review (CCAR) carried out in the United States in 2014 was 2.9%; it was 3.9% in the AQR and stress test carried out in Spain in 2012, and 2.1% in the EBA stress test carried out in 2011. Overall, the ECB's comprehensive assessment identified a capital shortfall of €24.6 billion across 25 participating banks across the Eurozone, including nine in Italy, three in each of Cyprus and Greece, two in each of Belgium and Slovenia, and one in each of Austria, France, Germany, Ireland, Portugal 10/46656629_3 5 and Spain. Two Greek banks have a shortfall on a static balance sheet projection, but will have dynamic balance sheet projections (based on their approved restructuring plans) taken into account in determining their final capital requirements; under the dynamic balance sheet assumption, these banks have no or practically no shortfall taking into account net capital already raised. Additionally, the shortfalls identified in relation to the two Slovenian banks will be covered by restructuring measures already taken. One Belgian bank, which benefits from a state guarantee, will not need to proceed with capital raising taking into account its orderly resolution plan. See the Annex to this note for aggregate shortfall results and a comparison to the EBA's results. The banks identified as having capital shortfalls will be required to submit capital plans by 10 November 2014 detailing how the shortfalls will be filled. Capital shortfalls will be expected to be covered within six months for those identified in the AQR or the baseline stress test scenario, and within nine months for those identified in the adverse stress test scenario, with the timeline starting from publication of the ECB's results. Twelve of the 25 banks have already covered their capital shortfall by increasing their capital since 1 January 2014, leaving a net aggregate shortfall of €9.5 billion to be filled by the remaining 13 banks. The list of individual banks with shortfalls, including net eligible capital raised and the resulting net shortfalls, can be found in the Annex to this note. Detailed results for all participating banks are included in the appendices to the ECB's aggregate report, and the full set of bank-by-bank results is available on the ECB's comprehensive assessment website. It should be noted that although the ECB identified 25 banks with capital shortfalls, the EBA has identified only 24 banks with capital shortfalls; this is because one Spanish bank, Liberbank, reported a CET1 ratio below 8.0% in 2013 only and is thus excluded from the EBA's shortfall results. Next Steps Banks with shortfalls are required to submit capital plans by 10 November 2014 and the adequacy and credibility of those plans will be assessed by the joint supervisory teams, who will also track the incorporation of further remedial actions by each bank. The banks are required to implement measures to cover the shortfalls: • within six months for shortfalls identified in the asset quality review or stress test baseline scenario; and • within nine months for shortfalls identified in the stress test adverse scenario. The SSM will evaluate follow-up action on capital quality impact of divergence in transitional adjustments to CET1. The European Commission has issued a statement welcoming the publication of the results of the EU-wide stress tests and comprehensive assessment, and noting that should state support be necessary, the Commission will apply EU state aid rules in line with its Banking Communication of August 2013.10/46656629_3 6 ANNEX EBA and ECB shortfall results EBA results ECB results Country Bank Shortfall adverse 2016 (€bn) Net CET1 capital raised or converted (€bn) Shortfall adverse 2016 after capital raised (€bn) Shortfall 2016 (€bn) Net eligible capital raised or converted (€bn) Shortfall 2016 after net capital raised (€bn) CET1 ratio starting point CET1 ratio post AQR CET1 ratio baseline scenario CET1 ratio adverse scenario AT Österreichische Volksbanken‐AG with credit institutions affiliated according to Article 10 of the CR 0.86 - 0.86 0.86 - 0.86 11.5% 10.3% 7.2% 2.1% BE AXA Bank Europe SA 0.20 0.14 0.07 0.20 0.20 - 15.2% 14.7% 12.7% 3.4% BE Dexia NV 0.34 - 0.34 0.34 - 0.34 16.4% 15.8% 10.8% 5.0% CY Bank of Cyprus Public Company Ltd 0.92 1.00 - 0.92 1.00 - 10.4% 7.3% 7.7% 1.5% CY Co‐operative Central Bank Ltd 1.17 1.50 - 1.17 1.50 - -3.7% -3.7% -3.2% -8.0% CY Hellenic Bank Public Company Ltd 0.28 0.10 0.18 0.28 0.10 0.18 7.6% 5.2% 6.2% -0.5% DE Münchener Hypothekenbank eG 0.23 0.41 - 0.23 0.41 - 6.9% 6.9% 5.8% 2.9% ES Liberbank, S.A.¹ n/a n/a n/a 0.03 0.64 - 8.7% 7.8% 8.5% 5.6% FR C.R.H. ‐ Caisse de Refinancement de l’Habitat² 0.00 0.25 - 0.13 0.25 - 5.7% 5.7% 5.7% 5.5% GR Eurobank Ergasias 4.63 2.86 1.76 4.63 2.86 1.76 10.6% 7.8% 2.0% -6.4% GR National Bank of Greece 3.43 2.50 0.93 3.43 2.50 0.93 10.7% 7.5% 5.7% -0.4% GR Piraeus Bank 0.66 1.00 - 0.66 1.00 - 13.7% 10.0% 9.0% 4.4% IE Permanent tsb plc 0.85 - 0.85 0.85 - 0.85 13.1% 12.8% 8.8% 1.0% IT Banca Carige S.P.A. ‐ Cassa di Risparmio di Genova e Imperia 1.83 1.02 0.81 1.83 1.02 0.81 5.2% 3.9% 2.3% -2.4%10/46656629_3 7 IT Banca Monte dei Paschi di Siena S.p.A. 4.25 2.14 2.11 4.25 2.14 2.11 10.2% 7.0% 6.0% -0.1% IT Banca Piccolo Credito Valtellinese 0.38 0.42 - 0.38 0.42 - 8.8% 7.5% 6.9% 3.5% IT Banca Popolare Dell'Emilia Romagna Società Cooperativa 0.13 0.76 - 0.13 0.76 - 9.2% 8.4% 8.3% 5.2% IT Banca Popolare Di Milano ‐ Società Cooperativa A Responsabilità Limitata 0.68 0.52 0.17 0.68 0.52 0.17 7.3% 6.9% 6.5% 4.0% IT Banca Popolare di Sondrio 0.32 0.34 - 0.32 0.34 - 8.2% 7.4% 7.2% 4.2% IT Banca Popolare di Vicenza ‐ Società Cooperativa per Azioni 0.68 0.46 0.22 0.68 0.46 0.22 9.4% 7.6% 7.5% 3.2% IT Banco Popolare ‐ Società Cooperativa² 0.43 1.76 - 0.69 1.76 - 10.1% 7.9% 6.7% 4.7% IT Veneto Banca S.C.P.A. 0.71 0.74 - 0.71 0.74 - 7.3% 5.7% 5.8% 2.7% PT Banco Comercial Português 1.14 -0.01 1.15 1.14 -0.01 1.15 12.2% 10.3% 8.8% 3.0% SI Nova Kreditna Banka Maribor d.d. 0.03 - 0.03 0.03 - 0.03 19.6% 15.7% 12.8% 4.4% SI Nova Ljubljanska banka d. d. 0.03 - 0.03 0.03 - 0.03 16.1% 14.6% 12.8% 5.0% TOTAL 24.19 17.90 9.52 24.62 18.59 9.47 10.0% 8.4% 7.2% 2.1% ¹ Liberbank reported a CET1 capital ratio below 8.0% in 2013 only and is not included in the EBA results ² Higher shortfall in the baseline 2016 scenario, reflected in the ECB's results
