Stress test results 2018: Belgian banks KBC and Belfius demonstrate continued improvement
London/Brussels, 2 November 2018 – In the stress test results of Europe’s 48 largest financial institutions published today by the European Banking Authority (EBA), the Belgian banks KBC and Belfius perform well above the European average and demonstrate continued improvement in their resilience.
Objective of the Stress testing exercise 2018
The EBA published today the detailed results of the EBA stress test exercise conducted for 48 large EU banks, of which 33 institutions in euro area countries directly supervised by the European Central Bank (ECB). The EU-wide stress test exercise for the group of the largest EU banks includes Belfius and KBC Group. ING Belgium and BNP Paribas Fortis, which are subsidiaries of foreign banking groups, are included in the stress test through their parent institutions.
The objective of this 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 three-year horizons. The assumptions regarding the macroeconomic variables in the baseline scenario are in line with the December 2017 forecast published by the ECB. The adverse scenario, designed by the ECB and the European Systemic Risk Board, is a hypothetical one reflecting the systemic risks that were assessed as representing the most material threats to the stability of the EU banking sector at the start of the exercise in January 2018.[1]
As the adverse scenario of the stress test is hypothetical, the estimated impacts of this scenario should not be considered as forecasts of banks’ profitability. In addition, the results do not take account of possible reactions of banks to shocks, as the stress test is based on an assumption of a static balance sheet. The stress test results can nevertheless serve as a valuable analytical tool for assessing the potential resilience of bank balance sheets in response to the specific shocks considered.
Similar to the 2016 EU-wide stress test, the 2018 EU‐wide stress test has no pass/fail threshold for the projected Common Equity Tier 1 (CET1) capital ratio in the adverse scenario.[2] It has been designed to be used as an important input into 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 being discussed with individual banks in the SREP, where mitigating management actions and potential dynamics of balance sheets may also be considered.
[1] For more detail see https://www.eba.europa.eu/-/eba-launches-2018-eu-wide-stress-test-exercise
[2] Common Equity Tier 1 (CET1) capital is a component of Tier 1 capital that consists mostly of common stock issued by a bank or other financial institution.
Results of Belgian banks
KBC and Belfius, the two Belgian banks who were exposed to the stress test, each had a good starting position relative to the sample of large euro area banks. At the starting point for the exercise (end 2017) the CET1 capital ratios stood at 16.3% for KBC and 15.9% for Belfius. These values compared favorably with the average starting position for the sample of euro area banks of 13.7%.
The performance of KBC and Belfius in the 2018 stress test is also strong in comparison with other euro area banks. With respect to the baseline scenario, KBC and Belfius, along with other euro area banks, report an increase in the CET1 capital ratio, meaning that the projected CET1 capital ratios at the end of the stress test horizon (i.e., end 2020) in the baseline scenario are actually higher than the CET1 capital ratios at the starting point. Whereas the euro area banks report an average increase of the CET1 capital ratio of 1.0 percentage point in the baseline scenario, Belfius reports an increase in the CET1 capital ratio of 1.8 percentage points, and KBC reports an increase of 2.2 percentage points.
In the adverse scenario also, KBC and Belfius outperform most other euro area banks, in that the drop in their CET1 capital ratio is less pronounced than the euro area average of 3.8 percentage points. KBC reports a depletion of the CET1 capital ratio in the adverse scenario of 2.8 percentage points, whereas Belfius reports a CET1 capital depletion of 2.7 percentage points.
Given their higher starting CET1 capital ratios and the lower estimated depletion in the adverse scenario, the projected 2020 CET1 capital ratios for the two banks in the adverse scenario thus stand at 13.6% for KBC and at 13.2% for Belfius, well above the euro area average projected 2020 CET1 capital ratio of 9.9%.
The better starting positions of the two Belgian banks and their performance in this year’s stress test exercise reflect at least in part the continuing effects of the adjustments that these banks have made in recent years, including strengthening of their capital position, de-leveraging and decreasing legacy assets inherited from the crisis.
Conclusion
We can conclude that the stress test results for KBC and Belfius demonstrate the continued improvement in their resilience. This is a welcome development in an environment going forward that nevertheless remains challenging for the profitability of European banks.