Barclays Posts Lowest Capital Ratio in Latest EU Stress Test

(Bloomberg) -- Barclays Plc saw its key measure of financial health sink to the lowest level among 48 banks in a European stress test, which gauged how well lenders could withstand heavy credit losses and other Brexit-related fallout.

Barclays’s fully loaded common equity Tier 1 ratio, a measure of its highest-quality capital, shrank to 6.37 percent in a so-called adverse scenario. Fellow London lender Lloyds Banking Group Plc didn’t fare much better in the test, with that gauge of financial health falling to 6.8 percent. That compared with a comparable ratio of 14.85 percent for Dutch bank ABN Amro Group NV.

The outcome of the stress test, which has no pass or fail grade, matters because it helps supervisors determine if banks need to add capital and what level of shareholder dividends and staff bonuses they can pay out. Over the test’s three-year horizon, 25 banks would have faced regulatory restrictions and decreased payouts by 52 billion euros ($59 billion).

Barclays downplayed the importance of the results, saying the European Banking Authority test didn’t take into account business strategies and management actions since the end of 2017 or future initiatives. It also said its capital requirements will mainly be informed by the Bank of England’s own stress test results on Dec. 5.

“The U.K. economic scenarios were worse than for the Euro zone in the adverse scenario – so it’s not really a comparable test,” said Joseph Dickerson, a bank analyst in London with Jefferies Group LLC.

Brexit Uncertainty

The EBA stress test envisages a scenario with shocks such as years of negative economic growth and a rise in government bond yields, amid Brexit-related uncertainty. In Italy, bank shares have plunged recently as the populist government challenges European Union rules to ramp up deficit spending next year. German lenders have been buffeted by a a particularly harsh scenario that assumes a steeper drop in gross domestic product than the rest of the EU.

Gary Greenwood, an analyst at Shore Capital, said Barclays has a “green light” to buy back preferred shares and is talking about share buybacks, so there doesn’t appear to be any concern around capitalization. Barclays CEO Jes Staley said last month that his firm was ready to take on U.S. rivals after recording “the best performance of any bank to report thus far” for the third quarter.

Deutsche Bank AG, which is struggling to grow after a series of failed reboots, saw its CET1 decline to 8.14 percent in the adverse scenario, which also subjected banks to two years of negative economic growth and a rise in government bond yields.

Banco BPM SpA was the worst performer among the four Italian lenders tested, with a common equity Tier 1 ratio of 6.67 percent in the adverse scenario. Unione di Banche Italiane SpA’s gauge was 7.46 percent.

Here are some other key results published on Friday, which show the banks’ fully loaded CET1 ratios in the test’s adverse scenario:

  • UniCredit SpA: 9.34 percent
  • Intesa Sanpaolo SpA: 9.66 percent
  • BNP Paribas SA: 8.64 percent
  • Societe Generale SA: 7.61 percent
  • NordLB: 7.07 percent
  • Banco Santander SA: 9.2 percent

The EU legal minimum for CET1 is 4.5 percent of risk-weighted assets, though supervisors generally set higher requirements on a bank-specific basis.

Barclays, Societe Generale SA and Deutsche Bank had the lowest CET1 ratios of 11 banks that are deemed of global systemic relevance, while Nordea Bank had the highest.

BankCET1 Ratio in Adverse Scenario
Barclays6.37%
SocGen7.61%
Deutsche Bank8.14%
BNP8.64%
HSBC9.18%
Santander9.2%
UniCredit9.34%
RBS9.92%
Credit Agricole10.21%
ING10.7%
Nordea16.68%

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