ECB stress tests bring Italian banks, real estate in focus

Review highlights shortcomings of Italian banks’ capital and real estate overvaluations.

The European Central Bank’s Comprehensive Assessment has highlighted the shortcomings of Italian banks’ capital reserves and European banks’ €29.5bn real estate overvaluations.

The results of the stress test, announced yesterday, are expected to prompt some struggling banks to raise capital and sell off assets such as real estate and non-performing real estate loans in order to generate cash.

There were 25 banks in total with a total capital shortfall of €24.62bn at the time when the static balance sheet assessment was made on 1 January.

stress test capital shortfall

However, since then many of them have been working hard to raise new capital; and now only 13 had a capital shortfall, according to the ECB’s assessment.  Moreover, five of these banks were deemed by the ECB to have no need to raise capital as a result of either having a state guarantee,  a negligible shortfall that would be covered by future profitability or were due to cover the shortfall with capital already being raised.

The remaining eight banks are those most severely impacted with a total capital shortfall net of capital raised of €6.35bn. Of those banks, half were Italian with a total €3.31bn shortfall. They were: Monte dei Paschi di Siena, which had the largest shortfall of any bank (€2.11bn); Banca Carige (€0.81bn); Banca Popolare di Milano (€0.17bn) and Banca Poplare di Vicenza (€0.22bn).

The other banks that had a capital shortfall after raising new capital were the Portuguese Banco Comercial Português (€1.15bn), the Austrian Voksbanken-Verbund (€0.86bn), the Irish Permanent TSB (€0.85bn) and the Cyprian Hellenic Bank (€0.18bn).

Significant capital – €18.59bn – was raised by some of Europe’s banks since the start of the year in order to sure up their balance sheets ahead of the process. Greek banks were particularly active – Eurobank raised €2.86bn, National Bank of Greece €2.5bn and Piraeus Bank, €1bn. Bank of Cyprus raised €1bn and the Cyprian Cooperative Central Bank, €1.5bn with Italy’s Banco Popolare raising €1.76bn.

A major feature of the ECB’s comprehensive assessment was its Asset Quality Review (AQR), which took a detailed dive into the loanbooks of the banks and applied a standarised ECB definition of non-performing exposures. This, plus the AQR’s review of credit files, found that the banks were underestimating non-performing exposures (NPE) by €135.9bn.

Non-residential real estate was a major contributor, making up 27%, or €36.7bn of these total writedowns.

The actual underlying real estate collateral held against loans of the banks assessed by the ECB’s analysis were found to be “severely affected” by their revaluation when re-examined. In total real estate assets were overvalued by €29.5bn with commercial real estate being the most overvalued in absolute terms – €11.6bn – and land in relative terms – 38%.

collateral valuation

The banks that were analysed, which the ECB selected as those most systemically important, were geographically most exposed to Mediterranean real estate and had a total of €135.2bn of real estate collateral in the region, which was previously €28.2bn overvalued.

adjustment by country“The benefit of the AQR is that the true extent of banks’ nonperforming loans is now out in the open and banks can now consider setting off parts of their loan books in order to meet the capital shortfall. Before the AQR, selling off loan books would have meant admitting that they were not properly valued in the banks accounts. On the back of this, and ongoing improvements to real estate values, we can expect to see an increase in loan sales over the next year,” says Dr Neil Blake, head of EMEA research at  CBRE.

*All charts are from the European Central Bank’s Aggregate Report on the Comprehensive Assessment