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Article / 27 October 2014 at 9:16 GMT

ECB stress test sparks rally in European banking stocks

Head of Equity Strategy / Saxo Bank
Denmark
  • European equities gaining after ECB stress test
  • Erste Group, Raiffeisen and Commerzbank all gaining
  • Banca Monte dei Paschi down 15.2% after failing test

By Peter Garnry 

European equities are gaining in early trading following the positive tune from the Asia session after banks performed better than expected in the European Central Bank's review of 130 of the largest banks in the region – highlighting the limited need for additional capital.

It's not surprising that the biggest gainers are among the biggest losers this year – with Erste Group and Raiffeisen up 7.4% and 5.9% respectively.

German lender Commerzbank is also gaining as much as 4.9% as it passed the adverse stress test. 

The biggest loser is, of course, Banca Monte dei Paschi, down 15.2%, as the Italian bank failed the stress test. It needs to raise an additional EUR 2.1 billion of capital. It has two weeks to come up with a plan and has already hired banks to help with its strategic options. The bank has nine months to plug the capital shortfall.

Europe biggest gainers and losers










German banks are among the cheapest banks in Europe, with Commerzbank and Deutsche Bank both trading at 0.5x on the price-to-book ratio. After the ECB's assessment, investors now have more clarity and visibility of those two banks' books, and the valuation should gradually adjust to more meaningful levels.
 
Commerzbank share price the past year
Commerzbank share price
Source: Saxo Bank 

ECB stress test is good news

The ECB stress test highlights the EUR25bn capital shortfall among 25 banks. Sounds bad, but it is not.

Of the 25 banks failing in the adverse stress scenario, 12 have already covered their capital shortfall by increasing their capital by ERU15bn in 2014. None of the euro area's largest banks failed the adverse stress scenario, which included a deviation in GDP by -1.9% in 2014, -5.1% in 2015 and -6.6% in 2016. 

The adverse stress scenario will deplete the Common Equity Tier 1 ratio by 4% points, which is more than the 2.9% points that US banks would lose in the US Federal Reserve's stress test. In other words, the ECB has tested euro area banks against a very harsh economic environment.

The assessment also shows that Spanish banks have adequate capital to weather a severe downturn in economic activity – and that indeed is a very positive sign. 

– Edited by Oliver Morrison

Peter Garnry is head of equities strategy at Saxo Bank. 

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