European Financials – UK banks pass stress test results for the first time, but Brexit spoils the party. The Bank of England released its annual stress test results today, following in the slipstream of the European Banking Authority health tests that we discussed yesterday. The positive news was that no bank needed to strengthen its capital position, which was the first time since the BoE began stress tests in 2014. Under a scenario more severe than 2008, the participating banks would have an aggregate CET1 capital ratio of 8.3%. Indeed, capital positions are far stronger than at any time before. The aggregated common equity Tier 1 (CET1) ratio was for instance 13.4%, three times larger than a decade ago. However, the results were clouded, as thoughts on Brexit reach fever pitch. Lawmakers calculate that new laws would have to be implement to stop any problems with the GBP 26tr pounds worth of cross-border derivative contracts held by EU and British policyholders. The BoE stated that the largest retail banks must hold a further GBP 6bn in capital to protect themselves against a Brexit crisis. Mark Carney, the Governor of the The Bank of England, went further and stated that “In the event of a sharp disorderly Brexit, there will be an economic impact on households, on businesses. There will be lost markets before new markets are found, and there will be some pain associated with that”.171128-Global-Daily.pdf (44 KB)
The positive stress test results conform to our view that we are now entering a new banking world. The changes that have occurred since the financial crisis are vast. The application of the bail-in legislation (BRRD), a pan-eurozone supervision creation (the SSM), and the creation of a new debt class in the bank creditor hierarchies have been great achievements in strengthening safety across the European banking sector. All of these changes have been done in combination with a huge push for stronger balance sheets across the sector. The result is that banks are significantly stronger in capital, while they have de-risked their balance sheets as well. For more details on the evolution of the banking sector and what it means for Europe, please see our note. (Fouad Mehadi).
Euro macro: Bank lending to companies jumps higher – ECB data that was published today showed that bank lending to non-financial companies jumped higher in October. The monthly flow in loans (adjusted for sales and securitization) soared to EUR 27.6bn, up from 7.5bn in September. Consequently, the adjusted annual growth rate increased from 2.4% in September to 2.9% in October, reaching its highest level since June 2009. The details of the report show that growth in lending is concentrated in longer-term loans, which often are related to fixed investment. Annual growth in loans with a maturity of between 1 and 5 years was 4.5% in October, while loans with a maturity shorter than 1 year contracted by 0.8%. Accelerating longer term bank lending to non-financial companies adds to the evidence that fixed investment growth in the eurozone is strengthening. Indeed, we think that corporate investment will be a main driver of GDP growth next year. (Aline Schuiling)