Europe's bank test celebrations mask mounting challenges

Sun Oct 26, 2014 5:51pm EDT
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By Laura Noonan

FRANKFURT (Reuters) - Investors were spared immediate pain on Sunday after the European Central Bank's landmark banking health check did not force massive capital hikes amongst the euro zone's top lenders.

But the sector's long-term attractiveness has been damaged by revelations of extra non-performing loans and hidden losses that will dent future profits.

The ECB said on Sunday the region's 130 most important lenders were just 25 billion euros ($31.69 billion dollar) short of capital at the end of last year, based on an assessment of how accurately they had valued their assets and whether they could withstand another three years of crisis.

The amount of new money needed falls to less than 7 billion euros after factoring in developments in 2014, well shy of the 50 billion euros of extra cash investors surveyed by Goldman Sachs in August were expecting. That means existing investors will only be asked for a fraction of the demand they expected in order to maintain their shareholdings.

But, those who read the details of the ECB's proclamation on the health of the euro zone banking sector would have seen more ominous signs too, as the ECB pointed to the amount of work that remains to be done to restore the region's lenders.


The review said an extra 136 billion euros of loans should be classed as non-performing - increasing the tally of non-performing loans by 18 percent - and that an extra 47.5 billion euros of losses should be taken to reflect assets' true value.   Continued...

General view of the headquarters of the European Central Bank (ECB) in Frankfurt October 26, 2014.   REUTERS/Ralph Orlowski