The title of my column last Friday afternoon was always intended to have been bold, even if optically potentially rather foolhardy, coming as it did just hours ahead of the release of the European banking health checks. “EU stress tests stress UniCredit less”, my headline screamed. UniCredit shareholders, clearly, were less convinced but I stand by every word of it.
Regardless of the fact that UniCredit shares were up 7% while I was writing my comment; my bigger point was that the banks all had their numbers crunched by the analyst community so what surprises could there possibly be?
And on the basis that the stress tests were point-in-time snapshots based on static 2015 balance sheets, so by definition excluded any remedial actions taken or progress achieved in 2016, let alone announced future actions, it was less a case that they should have been taken with a pinch of salt; more that they were just that: static historical snapshots that should have confirmed what we already knew or been a basis for taking a view.
And by-and-large they did just that. But in the absence of any shocks, why on earth did shares in pretty much all of the 30-plus banks that have stock listings out of the 51-strong stress test universe perform so badly on Monday, short of some sort of ‘sell the fact’ episode? Only three banks in the stress test universe saw positive stock performance on Monday.
UniCredit shares were hammered, easily the worst performer among the stress test universe, falling 9.4% on chunky volume on Monday and by another 4% again early on Tuesday, to €1.90. Why? I can find no plausible reason like an egregious unforeseen data point in the stress test that might have justified such a movement. Bearing in mind UniCredit is already reviewing unusual trading activity in its stock in the wake of its strategy review, short of the results having seriously spooked investors for some reason or other, there’s something mightily odd going on with the wild swings.
And what’s the story on the Irish banks? From Allied Irish Bank’s Friday close of €6.50, early trades Monday on the Irish Stock Exchange were off by 1.1%. But by the end of the trading day, AIB – one of the worst performers in the stress tests (adverse fully-loaded 2018 CET1 ratio of 4.31%) – saw its shares close up a staggering 12.92% at €7.34. Bank of Ireland, by contrast with a better adverse CET1 of 6.15%, was the second-worst stock performer of the stress test universe on Monday with shares losing an ungainly 6.49%. Go figure.
I read that Italian banks sold off because if the same valuation metrics were applied to their NPL workouts as were contained in BMPS’s heavily discounted sofferenze NPL securitisation (read: state bailout), their capital would be very severely depleted.
Hence Banco Popolare lost 5% and UBI Banca (which I gather may go after a cleaned-up BMPS) fell 6.2%. Even the relatively better-off Intesa Sanpaolo was down 3.5%. BMPS shares were off to the races at one point, up some 10% on the back of the rescue plan. But they lost their ground and closed flat on the day on the poor sentiment afflicting other Italian banks – which were pulled lower on bald extrapolations from the BMPS plan. Totally circular silliness.
Beyond that, I’m not sure what is to be gleaned from the results. Yeah, being a G-SIB with those supplementary buffers is a nuisance. Some banks did better than others in the stress test league table; some have less room for manoeuvre than they might be comfortable with; Barclays and Deutsche Bank have work to do (SocGen too).
You can argue, as many have, that the adverse scenario was not aggressive enough; and I personally thought chucking in conduct issues went beyond the realms of a reliable quantitative simulation and was therefore questionable. But at the end of the day no model is perfect and when all’s said and done, there’s only so much store you can set by theoretical exercises.
If you buy the narrative that it’s not capital that’s the problem but the banks’ inability to super-charge profitability, particularly in an environment of ZIRP/NIRP, and generate positive returns on equity, then the only thing that’s going to take them where policymakers want them is not more capital but sustained and sustainable economic growth. Nothing more, nothing less. And that element rests, alas, with those self-same policymakers.
