Italy’s biggest bank, UniCredit, has borne the brunt of lingering anxiety about the country’s banking sector, seeing its shares fall sharply following the EU-wide banking health checks. The 9.4% drop in UniCredit shares, which were being closely monitored by the Italian Borse on Monday amid heavy trading, followed Friday’s publication of stress tests on 51 banks across the EU.
In the European Banking Authority tests, UniCredit recorded a capital ratio of more than 7% after the stress test applied a hypothetical shock to global growth, interest rates and currencies. Although well above the legal minimumof 4.5%, it left Unicredit as one of the five weakest out of the 51 banks tested.
The deterioration in its capital ratio was not on the scale of Banca Monte dei Paschi di Siena (MPS) – Italy’s third largest bank – which announced a rescue package on Friday aimed at funding at least €5bn worth of capital, after the stress test showed that its entire capital base would be wiped out under the adverse scenario. MPS was the worst-performing bank of any bank tested.
Shares in MPS, regarded as the world’s oldest bank, were among the few to rally after the stress test results as its rescue operation appeared to alleviate pressure on the Italian government to intervene. Even so, questions remained about how easily MPS could find investors willing to stump up €5bn when its existing stock market value was less than €1bn.
The focus had been on Italian banks ahead of the stress tests, which overall showed that the EU’s banking sector could weather a shock to the markets. The pan-European banks share index was off just 0.6%. Antonio Patuelli, president of the Italian Banking Association, welcomed the results, saying: “The credibility of Italian banks has now been strengthened.”
The MPS rescue was viewed as positive. Tomas Kinmonth, fixed income strategist at ABN Amro, said: “It could be suggested that the prime benefit of the EBA 2016 stress test is that the Italian institution [MPS] is now significantly stronger.”
Portuguese and Greek banks were not big enough to be included in the tests, which also focused on banks in Ireland, Spain and Austria as well Germany’s biggest bank, Deutsche, whose capital ratio fell below 8% under the test. Analysts at Capital Economics said: “Among the eurozone countries, Ireland’s and Italy’s banks stood out.”
Moody’s said: “The stress test results highlight major differences in the relative strength of banking systems across the EU. The system-level results reflect the relative weakness of banks in Austria, Ireland and Italy. The key drivers are elevated credit risk of cross- border activities for the Austrian banks, and domestic market pressures for the Irish and Italian banks.”
The stress tests impose a series of scenarios on the capital bases of banks recorded at the end of 2015 and give results for three years later, without allowing the management of the banks to try to raise capital by selling off businesses.
Shares in UK banks Barclays and Royal Bank of Scotland slipped around 2%. Barclays’ capital ratio fell to below 7.5% under the stressed scenario, while RBS took the third largest hit of any bank to its capital under the test. RBS’s capital position would sink by seven percentage points to 8%. Moody’s said this was in part caused by “litigation and restructuring charges” faced by the bank, which is 73% owned by the UK taxpayer.
Gary Greenwood, analyst at Shore Capital, said the results for UK banks were a “non-event” as they will be subjected to Bank of England tests later in the year.
RBS publishes its half-year results this Friday, while Barclays reported a £2bn half-year profit last week.
