Deutsche Bank, Societe Generale among weakest lenders in European stress test

Frankfurt

DEUTSCHE Bank and Societe Generale emerged among the weakest of the large European lenders in a stress test that regulators will consult when vetting plans on investor payouts.

The German lender's common equity tier 1 (CET1) ratio, one of the most important measures of financial strength, fell 620 basis points to 7.4 per cent in an adverse scenario that assumes a prolonged period of low interest rates and a steep contraction of the economy over three years. Societe Generale's ratio dropped 562 basis points to 7.5 per cent in the European Banking Authority's (EBA's) assessment, published late last Friday.

"Deutsche Bank shows its resilience in a potential economic crisis even in a harsher and unfavourable scenario," chief financial officer James von Moltke said in statement. He pointed out that the bank's rising profits in the first half of 2021 weren't factored into the test.

The EBA's exam, which looked at 50 banks in the region, does not have a pass or fail grade, but it guides the European Central Bank and other regulators in assessing the financial system's capital needs, as well as the appropriateness of dividend levels and staff bonuses at the banks they supervise. The ECB announced in June that economic conditions have brightened enough for it to lift the restrictions on dividends in September.

The EBA's adverse scenario showed banks on aggregate are better prepared after the pandemic to deal with a severe economic crisis than they were three years ago. They built up a CET1 ratio of 15 per cent at the end of last year, the highest since the tests began. The measure dropped to 10.2 per cent in the adverse scenario, slightly better than in the last round of simulations three years ago.

"Banks have continued building up their capital base," the EBA said in a statement. "This was achieved despite an unprecedented decline of the EU's GDP and the first effects of the Covid-19 pandemic in 2020."

But the EBA also pointed to dispersion in individual banks' performance, with lenders focused on domestic activities or with lower interest income worst hit.

For Deutsche Bank and SocGen, the results represented a steeper drop than in some past tests. Deutsche Bank's CET1 ratio fell to 8.1 per cent in the 2018 test and 7.8 per cent in the 2016 exam. SocGen's ratio fell to 7.6 per cent and 7.5 per cent in those past tests. Capital rules require banks to maintain a minimum CET1 ratio of 4.5 per cent, plus other buffers that can be adjusted by regulators as needed.

Italy's Banca Monte dei Paschi di Siena saw its CET1 ratio slump to a negative 0.1 per cent in the adverse scenario, the worst among the lenders sampled. The world's oldest bank, still state-owned after a bailout, is now in talks about being acquired by UniCredit, according to a statement late last Thursday.

BNP Paribas, one of the lenders hit hard by the ECB's dividend restrictions, saw its ratio drop to 8.2 per cent, slightly better than at SocGen and Deutsche Bank. It is among 10 of the biggest eurozone banks that had set aside more than 22 billion euros (S$35 billion) before second-quarter earnings to reward shareholders, according to calculations by Bloom-berg. Banco Bilbao Vizcaya Argentaria, ING Groep, Intesa Sanpaolo and Nordea Bank also have big reserves.

SocGen said in June that it could potentially boost dividends when it has enough clarity on the regulatory framework and the outlook for the economy. The lender currently has a payout ratio of 50 per cent of underlying net income, including share buybacks.

Deutsche Bank has said it wants to resume paying dividends next year after chief executive officer Christian Sewing suspended them in 2019 to fund an extensive restructuring. Because it didn't pay a dividend at the time, it wasn't affected by the ECB's de facto ban last year.

The ECB imposed the ban partly as a trade-off for extensive regulatory relief granted to ensure credit kept flowing to businesses hurt by the crisis. Some bank executives have criticised the decision, saying it impaired their ability to raise capital because it has made banks less attractive for investors.

The ECB has said it will "assess the capital and distribution plans of each bank" individually, indicating that the removal of the cap doesn't mean it will allow banks to set payout levels at will. The 2021 stress test results will factor into those talks, it said.

When the ECB lifted the dividend cap, it also renewed its call on banks to tread carefully on bonus payments as part of its effort to keep banks from making large discretionary payouts to staff or investors that would deplete their capital cushions. The supervisor earlier rejected the compensation plans of several banks including BNP Paribas, Deutsche Bank and UniCredit, forcing them to cut their bonus pools, Bloomberg News has reported. BLOOMBERG