Banks boost equity, loan provisions in H1 ahead of ECB tests

Thu Oct 2, 2014 9:12am EDT
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By Laura Noonan

LONDON (Reuters) - Attempts by the euro zone's 20 largest banks to anticipate the outcome of European Central Bank stress tests continued in earnest in the first half, as lenders boosted equity levels and set aside more money for bad loans.

Data compiled by Reuters shows the 20 listed banks increased equity by 4 percent, or 26 billion euros ($33 billion), in the period and put a similar amount into loan loss provisions ahead of the ECB ruling on whether banks must raise cash, or revalue assets.

But vulnerabilities remain. The data shows banks have not taken provisions for bad loans worth about a third of equity. This means there could be a profound impact on banks' capital if the ultimate loss on these loans is higher than banks expect -- because the value of their loan collateral has fallen.

The ECB's landmark review of the euro zone's 131 most important banks is designed to banish lingering doubts about whether lenders value assets properly and are strong enough to withstand another recession or financial meltdown.

Previous stress tests have faced criticism for not making banks raise significant amounts of capital, or take drastic action. The ECB wants these tests to be judged not only on what banks must do at the end, but on what they did in the run up.

The results are due at on Oct. 26 and analysts say these top 20 listed banks, the lenders most closely watched by investors, may have to do more to recognize their bad loans.

"Major euro-area banks have strengthened balance sheets including some 20 billion euros of one-off provisions (for loan losses) since mid-2013," said Kinner Lakhani of Citi's European banking research team. "However, we still expect the ECB to further shift the goalposts."


The tower of the new European Central bank (ECB) (R) is pictured next to the former market hall 'Grossmarkthalle' at the site of the new ECB headquarters in Frankfurt, September 11, 2014.  REUTERS/Ralph Orlowski