Winners and Losers from Today’s European Stress Tests

Today European regulators released results of their latest round of banking stress tests as the continent checks its financial health amid worries over possible defaults from Greece, Portugal, Ireland, and most recently Italy. Rebuking skeptics, only eight of the ninety one banks on call failed the latest tests, though another sixteen “narrowly passed.” Analysts had projected that as many as 20 banks could fail the important benchmark tests, which would have forced a wider redistribution of assets to increase capital reserves. The results from this year’s tests were also more positive on the bottom line than recent measures, predicting a “worst case” capital shortfall of 2.5 billion euros, compared to last year’s shortfall of 3.5 billion euros.

Losers: Among the eight banks that failed tests, two are based in Greece (Eurobank EFG and ATEBank), five in Spain (Caja de Ahorros del Mediterraneo, CatalunyaCaixa, Banco Pastor SA, Unnim, and Grupo Caja), and one in Austria (Volksbanken).  The results highlight an increasingly dire scenario for Spain, which has dipped into an economic downturn following the collapse of its domestic real-estate market in recent months. In addition to the nation’s five failing banks, another seven were “narrow passers,” with one of the failing institutions reported the largest overall net capital shortfall of any bank tested, at 947 million euros. Spain’s Central Bank cited the country’s recent economic shortcomings, including a 1% decrease in GDP this year, among reasons many of its banks had difficulty raising capital reserves. Greek banks likely failed due to their high exposure to the nation’s sovereign debt, which continues to depreciate as an asset due to recent credit slashes from ratings agencies.

Winners: The biggest winners of the day were Irish banks Allied Irish Bank (NYSE:AIB) and Bank of Ireland (NYSE:IRE) whose stocks surged up 22% and 38% respectively in trading once the results circulated. The banks passed the tests with flying colors, leading investors to display restored confidence in the financials despite the gloomy internal debt issues their home nation currently faces. Also narrow winners were German banks Deutsche Bank AG (NYSE:DB) and Commerzbank AG, two of Europe’s largest lenders, which passed tests, though ranked “in the bottom half” of performers based on end-total capital reserve ratios.

Although the results of today’s tests were a mixed litter for European banks, but overall slightly encouraging, some insiders warn that the measures were too lax. A London-based Jeffries Intl. economist noted, “The stress tests are flexing the banking system for a shock, but not a particularly vicious one.” Another London analyst added, “It is an exercise in transparency more than anything else. It is not going to solve sovereign-debt concerns…but it helps us figure out which banks need what capital.”