Stress test 2023 RESULTS: Belgian banks KBC and Belfius demonstrate resilience to inflationary pressures
Based on a stress test of Europe’s 70 largest financial institutions, the results of which were published today by the European Banking Authority (EBA), the performance of Belgian banks KBC and Belfius was slightly above the European average, indicating good resilience to inflationary pressures.
Objective of the 2023 stress test
The EBA published today detailed results of a stress test conducted for 70 large EU banks, including 57 institutions established in the euro area that are subject to direct supervision by the European Central Bank (ECB). The EU-wide stress test covered the Union’s largest banks, including Belfius and KBC Group. ING Belgium and BNP Paribas Fortis, which are subsidiaries of foreign banking groups, were included in the stress test through their parent institutions.
The objective of the EU‐wide stress test is to provide supervisors, banks and market participants with a common analytical framework to compare and assess the resilience of large EU banks and the EU banking system to a number of hypothetical adverse economic shocks. The stress test contains a baseline scenario and an adverse scenario, both of which have a three-year horizon. The assumptions regarding the macroeconomic variables in the baseline scenario are in line with the ECB’s December 2022 economic projections. The adverse scenario, designed by the ECB and the European Systemic Risk Board (ESRB), is a hypothetical reflecting the systemic risks found to represent the most material threats to the stability of the EU banking sector at the start of the test in January 2023.[1]
As the adverse stress test scenario is a hypothetical one, the estimated impacts of this scenario should not be considered projections of bank profitability. In addition, the results do not factor in possible reactions of banks to shocks, as the stress test is based on the assumption of a static balance sheet. The stress test results can nevertheless serve as a valuable analytical tool when assessing the potential resilience of bank balance sheets to the specific shocks considered.
Like the 2018 and 2021 EU-wide stress tests, the 2023 test was designed to be used as an important input in the Supervisory Review and Evaluation Process (SREP), with the primary aim of setting total capital requirements. The stress test will thus be used as a supervisory tool, with the results discussed with individual banks in the context of the SREP, which will also allow risk-mitigation management measures and potential balance sheet dynamics to be considered.
Results of Belgian banks
KBC and Belfius, the two Belgian banks that were subjected to the stress test, each had a starting position slightly above the average for the sample of large euro area banks. Thus, at the start of the test (the end of 2022), the Common Equity Tier 1 (CET1)[2] ratio was 15.3% for KBC and 16.2% for Belfius, compared to 14.7% for the sample of euro area banks.
With respect to the baseline scenario, KBC and Belfius, along with a majority of other euro area banks, reported an increase in their CET1 ratio, meaning the projected CET1 ratio is higher at the end of the stress test horizon (i.e., the end of 2025) than at the beginning. More specifically, Belfius reported an increase in its CET1 ratio of 157 basis points, while KBC’s grew by 214 basis points.
In the adverse scenario, KBC and Belfius displayed slightly better resilience than most other euro area banks over the stress test horizon, in that the decline in their CET1 ratio was somewhat less pronounced at the end of 2025 than the average drop for euro area banks, which was 464 basis points. In this scenario, KBC reported a depletion of its CET1 ratio by 386 basis points, while Belfius’ CET1 ratio deteriorated by 412 basis points.
The projected CET1 ratio for 2025 in the adverse scenario is thus 11.4% for KBC and 12.1% for Belfius, so above the projected average of 10.1% for the euro area.
Conclusion
It can be concluded that the stress test results for KBC and Belfius demonstrate good resilience given the current macroeconomic and geopolitical uncertainty. This is welcome news at a time when the financial sector’s operating environment, characterised in particular by rising interest rates and increasing digitalisation, continues to present significant structural challenges and unpredictability for the sector as a whole and its future profitability.
[1] For more information, please visit https://www.eba.europa.eu/eba-launches-2023-eu-wide-stress-test-0
[2] Common Equity Tier 1 (CET1) is a component of Tier 1 capital consisting mainly of common shares issued by a bank or other financial institution.