Stress test results 2021: Belgian banks KBC and Belfius demonstrate good resilience in context of COVID-19 crisis
In the stress test results of Europe’s 50 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 good resilience in the context of the COVID-19 crisis.
Objective of the stress testing exercise 2021
The EBA published today the detailed results of the stress test exercise conducted for 50 large EU banks, including 38 institutions established in the euro area that are subject to direct supervision by the European Central Bank (ECB). The EU-wide stress test exercise for the group of the largest 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 2020 forecast published by the ECB. The adverse scenario, designed by the ECB and the European Systemic Risk Board (ESRB), 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 2021.
As the adverse stress test scenario 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 2018 EU-wide stress test, the 2021 EU‐wide stress test has no pass/fail threshold for the projected Common Equity Tier 1 (CET1) capital ratio in the adverse scenario. 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.
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 average of the sample of large euro area banks. At the starting point for the exercise (end 2020) the CET1 capital ratios stood at 17,6% for KBC and 16,4 % for Belfius. These values compared favourably with the average starting position for the sample of euro area banks of 14,7%.
With respect to the baseline scenario, KBC and Belfius, along with the majority of 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 2023) in the baseline scenario are actually higher than the CET1 capital ratios at the starting point. Belfius reports an increase in the CET1 capital ratio of only 35 basis points, and KBC an increase of 190 basis points.
In the adverse scenario, KBC and Belfius demonstrate a better resilience than most other euro area banks, in that the drop in their CET1 capital ratio is less pronounced than the average drop for euro area banks, which is 497 basis points. KBC reports a depletion of the CET1 capital ratio in the adverse scenario of 351 basis points, while Belfius’ CET1 capital ratio deteriorates by 270 basis points.
The projected CET1 capital ratios for the two banks for 2023 in the adverse scenario thus stand at 14,1% for KBC and at 13.7% for Belfius, well above the average CET1 capital ratio of 9.7% projected for the euro area for 2023.
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, control of their operational expenditure and the provisioning efforts made during the COVID-19 crisis.
We can conclude that the stress test results for KBC and Belfius demonstrate good resilience. This is a welcome development in the context of the current health crisis and at a time when the operating environment of the financial sector, characterised in particular by low interest rates and increasing digitisation, continues to present significant and structural challenges and uncertainties for the sector and its future profitability.
 For more details, see https://www.eba.europa.eu/eba-launches-2021-eu-wide-stress-test-exercise.
 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.