Italian Banks Not Worst for a Change, European Stress Test Shows

(Bloomberg) -- Italy’s biggest bank stocks may be under pressure, sliding over their exposure to slumping government debt, but they fared better than many of their peers in Europe’s strictest stress test ever.

The country’s largest lenders, Intesa Sanpaolo SpA and UniCredit SpA, finished in the middle of the pack, seeing their highest-quality capital ratios shrink to 9.66 percent and 9.34 percent respectively. Those results surpassed Societe Generale SA and Banco Santander SA, among others. The worst Italian performer, Banco BPM SpA, narrowly beat Britain’s Barclays Plc, which took last place.

Italian banks were closely watched in the European Banking Authority stress tests amid concerns that they are overexposed to the country’s sovereign debt and vulnerable to slowing economic growth. There are concerns that the sharp rise in yields on Italian bonds will hurt their capital levels going forward.

The results won’t surprise Intesa Chief Executive Officer Carlo Messina, who had maintained the test wouldn’t reveal any bad news for the lender. He described Intesa as “a clear winner of this exercise” after the results were released.

BPM said the results don’t reflect the “de-risking” actions it has taken this year, as well as some of the benefits of the merger that created the lender. UBI Banca SpA, whose key capital ratio dropped to 7.46 percent, said the test doesn’t take into account its recent reduction in non-performing loans and its “strong containment of operating costs.”

Italy’s average reduction in CET1 ratios under the test puts it just below the average and ahead of Spain, Sweden and Belgium. In the previous test released in 2016, Italy’s Banca Monte dei Paschi di Siena was the worst-performing bank in Europe. It wasn’t included in the last test after being rescued by the state.

Though the country’s slumping bonds may post capital risks in the long term, lenders face few immediate dangers, according to investors and analysts. Some said the government’s public spat with European authorities is a major factor hurting the stocks.

The EBA’s examination is based on banks’ 2017 figures, so they don’t reflect this year’s erosion of bond values, which started in May. Italian bank shares have been pummeled since bond yields began to rise, and took a fresh hit as the country’s leaders battled with EU authorities over Italy’s spending plans for next year.

©2018 Bloomberg L.P.