Last night the European Central Bank released the results of its “stress test” of the more than 100 banks which fall under its jurisdiction. Just over a dozen failed the test – but a couple of top rated banks which had been poorly rated, came through with flying colours. Sanlam Global Chief and SA’s top banking analyst Kokkie Kooyman joined me on CNBC Africa’s Power Lunch today to suggest some investment ideas flowing from the lengthy investigation. – AH
ALEC HOGG: Well, the ECB (the European Central Bank) released results of its Stress Test on Eurozone Financial Institutions yesterday. It came from the European Banking authority – lots of detail – and a far better man than I is joining us to discuss the implications of this. Kokkie Kooyman is with Sanlam Investments. Kokkie, you’ve been looking through the detail for a few hours now. Maybe to start off with: what was your overall view on the health of European Financial Institutions?
KOKKIE KOOYMAN: The overall view is basically, more or less as expected, that the health is good. Of the 130 banks reviewed, in the end there are only two, one of which is fairly large and needs more capital. Of the 130 banks, 13 banks in total, failed the test but as I say, only the two really, are big enough. The others are fairly small. The interesting about the eight that don’t have plans yet: four of them are Italian, so it shows there is a bit of a problem in the Italian banking environment, which we’ve known. Italian authorities have been rather lax on enforcing reviews. What one also needs to bear in mind is that the exercise started in January 2014, so this was a 10-month exercise and many of the poor quality assets that were identified – (€136bn) worth of assets that were classified as bad that weren’t classified as bad in January…
A lot of that has been washed under the bridge already because banks have been taking action. In the end, the Stress Test review came out quite good on the European Banks. It shows that they are well capitalised now. In an adverse scenario (and they tested this) as to how banks would react in a stress or adverse scenario, they found that the average banking capital levels would go from 12.5 to five- point-five percent. In other words, if we had a repeat of 2008 – currently, banks have a Capital Adequacy Ratio of 12.5 – it would go to five-point-five, bearing in mind that the current regulatory minimum is eight. In a Stress Test however, they would like banks to be above five. The bottom line…what they said is that if we have a repeat of 2008, European banks would still be above the minimum required capital levels.
ALEC HOGG: Those 13 banks that failed, Kokkie: what does it mean for them and indeed, for the shareholders in those companies?
KOKKIE KOOYMAN: They need plans to shore up the capital and in fact, the largest one (Montei dei Paschi) in Italy already announced that they’d approached two investment bankers to advise them on their various options but indeed, the need to sell distressed assets and they need to raise more capital. Most of these banks are very small. It’s just the two, of which, Montei dei Paschi is the largest. Interestingly, it’s also the oldest bank in the world (definitely, in Europe – I think in the world, as well. It started in 1476, which by the way, is before we even had a double-entry accounting, which was started by Lucas Pacioli. I don’t know how they ran a bank before they had a double-entry accounting system
ALEC HOGG: Well, the Italians are rather good at many things, including that double-entry accounting system. Weren’t they, Kokkie? Has the market reacted to those 13 banks? Have the share prices fallen?
KOKKIE KOOYMAN: I haven’t had time to look at the smaller banks. Generally, reading all the reports last week, most of this was expected and you can indeed see that the remaining banks – Commerzbank, ING, and Intesa in Italy – all those banks started off very strongly this morning, being up one to two percent. Despite the expectations, you can see that there is a bit of a ‘sigh of relief’. You never quite know what the regulators could come out with, so I think that going forward now, what is more important is that European banking has been declared healthy again. However, remember that we’ve had two previous Stress Tests like this that also came out health and then they were found not to be healthy.
This time, the exercise is a lot more thorough and I think they knew that the ECB’s credentials are on the line, so this time they made quite they did the Stress Test scenario well. Going forward, it means that banks – in theory – can lend more aggressively because they have enough capital, but I think the problem in Europe is more one of demand. There is no demand for lending, so you have healthy banks but you have unhealthy consumers or unhealthy appetite by commercial/industrial companies and consumers.
ALEC HOGG: From a South African perspective clearly, the Bank of England looks after the British banks, so they would not have been included (presumably), but quite a few people here have connections with Ireland. We now think your company, Investec, certainly has investments there. Of the PIIS (Portugal, Ireland, Italy, and Spain) that were in trouble Kokkie, which of those…? We know that there’s a Portuguese bank (Caixa), which has an investment here in South Africa through Mercantile. Did they come out with a clean Bill of Health? You mentioned the Italian Banks. What about the Spanish and the Irish?
KOKKIE KOOYMAN: BCP in fact, scraped through but do need more capital as well. The two countries that came out the most negative were in fact, the Greek banks and the Italian banks. The Portuguese and Spanish came out okay; as did the Irish and the two largest Irish banks are now obviously, quite healthy (Bank of Ireland and Allied Irish). In that regard, it’s unlikely that there’d be any negative feedback through to South Africa. What I am seeing globally however – wherever we look, but specifically in Europe – is that every bank is looking at what they call non-core assets or assets that aren’t producing good results. What we’ve been expecting – and you do see many of these Portuguese assets that are in Africa (both Mozambique and Angola) are up for grabs for someone who puts down a good price.
In addition, the problem is that nobody is currently prepared to pay a good price because banks have learned that expansion beyond your borders is not as exciting as it was always thought to be. Regarding South African banks who are still trying to grow offshore, there might be a couple of asset floating around that are for sale.
ALEC HOGG: Were there any of the banks that came out better than anticipated and in other words, could offer a more attractive investment opportunity as a result of this?
KOKKIE KOOYMAN: Yes. The two banks that are generally mentioned, as…I wouldn’t say ‘coming out better than expectations, but came out as people expected’ are ING and Intesa, and we hold both of those in the Fund, so I could be punting our Fund here. That’s really, why we invested in them. They looked the safest. Intesa in Italy is the bank with the highest capital ratio and so that’s seen as a bank that could participate in buying the banks that the Stress Test revealed need more capital, and need to be consolidated. Similarly, ING were rescued by the Dutch Government post the crisis, and had been waiting for the review to be able to pay back the Dutch Government, and that means they can starting paying dividends as well. Before they paid back the Dutch Government, they couldn’t pay dividends to shareholders and the Dutch Government wouldn’t take the money back unless they were declared healthy.
Those are the two banks that have come through the best, and I think the share prices also saw the biggest rises this morning.
ALEC HOGG: Kokkie, just to close off with… If the South African banks were subjected to the same Stress Test, would they all pass?
KOKKIE KOOYMAN: What I say now is dangerous. No, I think so. The one thing about our banks is that Stress Management or Bad Debt Management has been fairly good. As we know, you previous session on African Bank highlighted that most of the problems we’ve seen were in the low end of the market, but your corporates and commercial banking has been done, very profitably and very conservatively, so I think our banks would come through quite well.
ALEC HOGG: ING and Intesa – two very hot tips there from Kokkie Kooyman. If you happen to be in the market for some banking assets in the former Portuguese Territories of Mozambique and Angola…well, they look like they could be for sale. That was Kokkie Kooyman from Sanlam Investments giving his views on results of the Stress Testing of European banks.
