These Banks Passed the Stress Tests: Are They Buys Now?

The European Banking Authority released the results of its much-anticipated stress tests late last week. The EBA put 90 European banks from 21 countries through the wringer, providing regulators with more than 3,000 data points per bank!

Per Bloomberg, "The criteria include a review of how the 90 lenders tested would handle a 0.5 percent economic contraction in the euro area in 2011, a 15 percent drop in European equity markets and trading losses on sovereign debt not held to maturity." The end result is a look at how their capital positions would look on Dec. 31, 2012, after these stress events.

Eight of the 90 failed to meet the 5% core Tier 1 capital ratio that represented adequate capital. A ninth bank is disputing the results. Another 16 passed, but fell into the 5%-6% danger zone. Yet no major bank failed the tests. As you'll see in the chart below, the large banks that many U.S. investors follow all exceeded both the stress test 5% and the danger zone 6%.

Bank

Country

P/B Ratio

Core Tier 1 Capital 
(Dec. 31, 2012)

Deutsche Bank

Germany

0.7

6.5%

National Bank of Greece (NYSE: NBG  )

Greece

0.5

7.7%

Allied Irish Banks (NYSE: AIB  )

Ireland

0.4

10.0%

Bank of Ireland (NYSE: IRE  )

Ireland

0.2

7.1%

ING (NYSE: ING  )

Netherlands

0.6

8.7%

Banco Santander (NYSE: STD  )

Spain

0.9

8.4%

BBVA

Spain

0.9

9.2%

Barclays

U.K.

0.5

7.3%

HSBC (NYSE: HBC  )

U.K.

1.2

8.5%

Lloyds (NYSE: LYG  )

U.K.

0.7

7.7%

Royal Bank of Scotland

U.K.

0.5

6.3%

Sources: EBA EU-Wide stress test summary and Yahoo! Finance.

Each of the banks above (except HSBC) trades below a price-to-book ratio of 1.0 -- the traditional threshold at which value investors salivate.

If you trust the stress tests, this basket of large European banks looks quite compelling. Unfortunately, it's not that easy.

Just as they did with last year's European stress tests, critics are pointing out that the stress tests were too easy. For example, the tests assumed a 25% haircut to 10-year Greek bonds, but the potential for outright Greek default wasn't factored in.

Another data point noted by the Wall Street Journal gives an additional illustration: "For example, they envision a worst-case Spanish unemployment rate of 21.3% this year and 22.4% next year -- compared with the 21.29% Spain reported at the end of the first quarter." That's notable both for the assumption and to remind investors how bad the economic situation is (21.29% unemployment!).

So take these tests for what they are -- an attempt to calm markets by providing more transparency. Stay tuned as analysis of the nearly 1,000 pages of released documents starts making its way online. Some of those 3,000-plus data points per bank will be much more valuable to us than the knowledge that the banks passed a relatively easy stress test.

For more analysis in another hot sector, click here to access our free report "3 Stocks for $100 Oil."

Anand Chokkavelu doesn't own shares of any companies mentioned.The Motley Fool owns shares of National Bank of Greece. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


Read/Post Comments (2) | Recommend This Article (11)

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Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On July 19, 2011, at 12:31 PM, QuickClickSell wrote:

    (resampled) The premise I had for investing is simple - In America's crisis, there were fall guys Wamu, New Century Bank, Indymac, Amtrust Bank, and the hundreds of other bank that were acquired or went bankrupt. When the dust settled, who was left? That's right. Too big too fail Citigroup and Bank of America. Now if they can survive that, why couldn't Greece's too big to fail bank, NBG, survive like the American banks, ESPECIALLY with the fact they have better financials?

    The biggest risk to me is the nationalization option. I bought some at 1.47 and if it still remains in the dollar range, I'll add some more next month. Right up or down all you want. I think NBG's too big to fail, and the fall guys will be some smaller banks with worse financials like Postbank and Piraeus Bank. They've survived a hundred years, what's to stop them surviving another hundred?

  • Report this Comment On July 22, 2011, at 9:46 PM, AaronRogers wrote:

    Fully agree with the prior poster. Except the 100 years part. Bear Stearns was no joke with regards to history as was Lehman. None the less, nationalization would also mean departure from the Euro and that's not happening. Much like the Fed this whole European debacle has actually strenghtened the reach and powers of the ECB.

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