By Geoffrey Smith
Investing.com — If Europe can’t stop the coming wave of bankruptcies from infecting the financial system, it won’t be for lack of trying.
Bank stocks were mostly higher in Europe Tuesday after the European Central Bank cut them yet more slack as regards their accounting through the crisis, saying it will let them operate at below their individually-mandated levels of capital for at least another two and a half years.
The Stoxx 600 Banks index was up 0.6%, slightly outperforming a 0.3% rise in the Stoxx 600 index. Spanish banks in particular were lifted by the ruling, a reflection of the concern that they’ll be needing the capital relief more than most if the second wave of Covid-19 infections really derails the summer tourist season.
The ECB is, however, exacting a price for its generosity. It extended its recommendation that banks pay no dividends by another six months to the end of the year (although it will review that decision at the end of the quarter). That will annoy UniCredit’s (MI:CRDI) Jean-Pierre Mustier in particular, who had big plans for capital returns until the crisis broke.
The central bank said it “commits to allow banks to operate below the P2G and the combined buffer requirement until at least end-2022…without automatically triggering supervisory actions.”
P2G, or Pillar II Guidance – is the capital ratio that the ECB tailors for each of the banks under its direct supervision. It reflects the degree of concern that the ECB has about a bank’s specific business model and balance sheet strength. Basically, the P2G capital ratio recommendation is the threshold at which the warning lights turn from amber to red.
The ECB had already signalled in March that it wanted banks to avoid foreclosing on bad debts in a hurry. It feared that panicked attempts to ringfence the financial system would make the Covid-19 downturn worse and, in doing so, ultimately raise the risk of a new financial crisis.
Given the historic deficit of trust shown by the market to Eurozone banks (their stocks have traded at a sharp discount to their book value for a decade), that was a brave decision: such guidance couldn’t help but raise further doubts among investors about the truthfulness of Eurozone bank balance sheets.
While it is far too early to say whether those doubts are justified, earnings season is already throwing up some interesting numbers. Spain’s Bankia (MC:BKIA) said on Tuesday its core tier 1 capital ratio – the key supervisory indicator of financial strength – rose by 32 basis points to 13.27% at the end of June, despite adding another 185 million euros to its loan loss provisions to the 125 million it posted in March.
Bankia’s bad loan ratio fell to 4.86% from 4.95%, as it shifted more of the bad loans left over from the last crisis just in time to accommodate a surge in Covid-driven non-performing loans. Bankia stock rose 2.4%.
Separately, Dutch-based ING (AS:INGA) said it will book an impairment of around 300 million euros in the second quarter against goodwill in respect of past acquisitions. ING stock fell 0.7%.
StockBeat: ECB Cuts the Banks More Slack – at a Price
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