Tuesday, July 19, 2011

European stress tests confirm FDR Framework

Bloomberg ran an article confirming yet another prediction under the FDR Framework.  In particular, the article confirms the prediction that market participants will analyze the most recently disclosed data and use the results of this analysis to exert market discipline.

In this particular case, market participants analyzed the European stress tests and their related data disclosure and are now requiring specific banks to raise more capital.
Deutsche Bank AG (DBK), Royal Bank of Scotland Group Plc (RBS), Societe Generale SA and UniCredit SpA (UCG) may face pressure from investors to boost capital after scraping through Europe’s banking stress tests. 
Deutsche Bank, Germany’s largest bank, had a core Tier 1 capital ratio of 6.5 percent under the test’s adverse scenario. While that surpassed the 5 percent fail rate, it ranked eighth among the 12 German banks that participated and 57th overall among the 90 banks tested. Edinburgh-based RBS had a ratio of 6.3 percent, Societe Generale of Paris 6.6 percent and Milan- based UniCredit 6.7 percent...
“Since the stress tests did not include any sovereign debt failure, some view them as not being stringent enough,” said Espen Furnes, an Oslo-based fund manager at Storebrand Asset Management, which oversees $74 billion. “If we see sovereign defaults, many of the large banks like Deutsche, SocGen and RBS will need new capital. These banks should strengthen their capital base to curb investor worries.”
Deutsche Bank, Societe Generale (GLE) and UniCredit said their capital ratios would have been higher had regulators recognized all the steps they were taking to increase reserves...
JPMorgan Cazenove analysts led by Kian Abouhossein said in a note after the test that as many as 20 banks may need to raise as much as 80 billion euros of additional capital to help allay investor concern over a Greek default. 
“The EBA tests give a lot of transparency and it looks like some of the banks, even if they did pass the 5 percent capital ratio minimum level, will likely need to boost their capital to regain market confidence and investors’ trust,” said Jonathan Fayman, a fund manager at BlueBay Asset Management Plc in London, which oversees about $43 billion....
Deutsche Bank said on July 15 that the stress tests failed to reflect the bank’s plans to reduce risk-weighted assets and retain earnings, as well as the “sound economic environment” in Germany. The company plans to reach a target for a core Tier 1 ratio above 8 percent by 2013 under Basel III rules. A spokesman declined further comment. 
By reducing risk-weighted assets, a bank can bolster its capital ratio. 
“I don’t expect Deutsche Bank to make a capital increase,” said Konrad Becker, a Munich-based analyst at Merck Finck & Co. “You have to look at the reason for the 6.5 percent ratio and it is not because of sovereign risk. It is mainly because of risk-weighted assets linked to derivatives and other assets.” 
Chief Executive Officer Josef Ackermann, 63, told reporters in Cernobbio, Italy, in April that the company is “well capitalized.” The Frankfurt-based bank raised 10.2 billion euros last October in its biggest-ever share sale to finance a bid for a controlling stake in Deutsche Postbank AG and meet stricter capital rules for banks. 
Societe Generale, led by CEO Frederic Oudea, 48, would have had a core Tier 1 ratio of 7.5 percent under the adverse scenario had the tests taken into account its first-quarter results, an option to pay dividends in shares, the annual capital increase reserved to employees and the reduction of capital allocated to risky assets, according to a statement on July 15. The bank reiterated that the ratio will climb to at least 9 percent in 2013 under Basel III. Spokeswoman Laetitia Maurel declined to comment. 
Berenberg Bank analysts including Nick Anderson said in a note yesterday that the EBA’s methodology was “relatively harsh” on RBS as it assumed a static balance sheet after 2010, ignoring the bank’s plans to sell holdings including its insurance unit to reduce assets by a further 10 percent by the end of 2012. 
RBS spokesman Michael Strachan declined to comment. The bank, run by Stephen Hester, 50, since November 2008, required a government rescue after piling up the most losses of any European bank during the financial crisis, according to data compiled by Bloomberg. 
“The bottom line is that the role of capital in a bank is not properly understood, putting pressure on banks to hold more capital rather than less in the future,” the Berenberg analysts said in the note. “The debate is now in the hands of politicians, the media and the markets, all now armed with stress test data.” ...
“The stress tests conducted showed that although only eight banks failed, several of the larger European banks are thinly capitalized,” said Furnes at Storebrand Asset Management.

No comments: