Bank reviews will not affect credit ratings, says S&P

The credit ratings agency, Standard & Poor’s, does not expect any major capital holes to emerge during the comprehensive assessment of eurozone banks over the course of 2014.

“That’s because we already recognise weaknesses in capital and asset quality in current ratings, and because we would expect some banks to adjust regulatory capital positions before the Oct 2014 announcement of results,” Standard & Poor’s credit analyst Osman Sattar said in the report.

“S&P expects that the ECB’s review of eurozone banks will have a limited impact on ratings.”

As part of EU banking union, the ECB will take over the supervision of eurozone banks as of Jan 2015.

However, 124 of the biggest banks in the region, including the three domestic Irish banks, will have to undergo asset quality reviews and stress tests as part of the comprehensive assessment.

The Irish banks have completed a balance sheet assessment, which will feed into the asset quality review. All three banks passed the minimum regulatory requirements.

“We expect the ECB’s assessment in 2014 to be more rigorous than the European Banking Authority’s stress test in 2011, because of the ECB’s greater independence and its new mandate as the single supervisory body for about 130 banks representing about 85% of banking assets in the eurozone.

“The ECB has listed 124 banks that are likely to be subject to its assessment. We rate 79 of these banks and our ratings currently consider that more than half of them have a rating weakness in our assessment of their capital strength or asset quality.

“This relative ratings weakness, in our view, is more bank-specific than country-specific as there are banks of varying strength in each country.

“In the report, we group rated banks subject to the ECB’s assessment by country and our view of the combined impact of capital and earnings and risk position on current ratings.”

The Central Bank fully stress tested the Irish banking system in Mar 2011. The State has recapitalised Bank of Ireland, AIB and Permanent TSB by just under €30bn.

“The ECB will be keen to start its supervisory responsibilities in Nov 2014 with banks that have the trust of investors and other stakeholders, and are either already well-capitalised or have a clear path toward that end.

“Well-capitalised banks that are trusted by stakeholders would also be in a much better position to support economic recovery. The ECB’s comprehensive assessment is a welcome and necessary step toward achieving these outcomes.

“In our view, the keys to success are greater transparency about banks’ asset quality, and balance sheet repair supported by credible backstops where necessary,” added Mr Sattar.

“Credible backstops and plans for corrective actions are critical for supporting confidence in the eurozone. Senior creditors of banks that fail the ECB’s asset quality review or stress test would unlikely face losses, in our view, but shareholders and some subordinated creditors could,” he said.