Today's edition of the Saxo Morning Call features the SaxoStrats team discussing the continuing weakness of the US dollar as commodity prices recover ground and in the wake of key US equity indices hitting all-time highs Thursday.
Article / 27 October 2014 at 9:16 GMT

ECB stress test sparks rally in European banking stocks

Head of Equity Strategy / Saxo Bank
  • 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. 


The Saxo Bank Group entities each provide execution-only service and access to permitting a person to view and/or use content available on or via the website is not intended to and does not change or expand on this. Such access and use are at all times subject to (i) The Terms of Use; (ii) Full Disclaimer; (iii) The Risk Warning; (iv) the Rules of Engagement and (v) Notices applying to and/or its content in addition (where relevant) to the terms governing the use of hyperlinks on the website of a member of the Saxo Bank Group by which access to is gained. Such content is therefore provided as no more than information. In particular no advice is intended to be provided or to be relied on as provided nor endorsed by any Saxo Bank Group entity; nor is it to be construed as solicitation or an incentive provided to subscribe for or sell or purchase any financial instrument. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. As such no Saxo Bank Group entity will have or be liable for any losses that you may sustain as a result of any investment decision made in reliance on information which is available on or as a result of the use of the Orders given and trades effected are deemed intended to be given or effected for the account of the customer with the Saxo Bank Group entity operating in the jurisdiction in which the customer resides and/or with whom the customer opened and maintains his/her trading account. When trading through your contracting Saxo Bank Group entity will be the counterparty to any trading entered into by you. does not contain (and should not be construed as containing) financial, investment, tax or trading advice or advice of any sort offered, recommended or endorsed by Saxo Bank Group and should not be construed as a record of ourtrading prices, or as an offer, incentive or solicitation for the subscription, sale or purchase in any financial instrument. To the extent that any content is construed as investment research, you must note and accept that the content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, would be considered as a marketing communication under relevant laws. Please read our disclaimers:
- Notification on Non-Independent Invetment Research
- Full disclaimer

Check your inbox for a mail from us to fully activate your profile. No mail? Have us re-send your verification mail