Will ECB become less demanding on Banks’ M&A?

The European Central Bank (ECB) published the outcomes of its 2019 Supervisory Review and Evaluation Process (SREP). While capital requirements in 2019 remain unchanged from 2018, at 10.6%, some significant concerns remain regarding business models’ sustainability, with low profitability as the most critical issue and decreasing quality in internal governance.

As reported in advance by Wall Street Journal a softer stance toward tie-ups could be one the resmpones coming from reuglatory authorities as the sector struggles to make money against backdrop of low rates.

SSM under Danielle Nouy used to require capital increases before allowing mergers (e.g. Banca Popolare di Milano and Banco Popolare in Italy) and this affected the convenience of these deals. Andrea Enria’s new course it seem that this approach may change as the case of Unicaja + Liberbank potential merger seem to prove.

Mr. Enria also acknowledged relevant achievement in NPL Reduction since banks with high levels of non-performing loans (NPLs) are broadly meeting the targets for cleaning their balance sheets.

When the ECB assumed its supervisory responsibilities five years ago, the volume of NPLs held by significant institutions stood at around €1 trillion (an NPL ratio of 8%). By the end of September 2019, it had been reduced to €543 billion (an NPL ratio of 3.4%).

 These banks are recommended to keep a strong focus on continuing to improve their credit risk profiles.

  • Banks with higher levels of NPLs are expected to have three-year reduction strategies in place for NPAs (non-performing loans and foreclosed assets[3]).
  • The following represents the actual existing stock of non-performing assets for year-end 2018 for 32 high-NPL banks[4]. The 2019-21 bar charts represent the banks’ own projected level of volume reduction of NPAs over the period end-2019 to end-2021.

  • As part of the NPL reduction strategies, banks are expected to forecast the reduction of NPLs by portfolio, reduction option and vintage bucket.
  • Based on the following chart, the banks are projecting a reduction in volume of very old NPL vintages over the period 2019-21. Vintages of two-five years are projected by banks to remain constant and there is a projected increase in the relative share of unlikely to pay loans.

Bottom on SREP 2019 :

  • SREP CET1 requirements and guidance (excluding systemic buffers and countercyclical buffer) for the 2019 cycle are stable overall at around 10.6% compared to the 2018 cycle.
  • Business model remains a key supervisory focus with supervisors highlighting banks’ business model sustainability as a key risk area of the SREP 2019.
  • Governance remains a risk area of particular supervisory concern due to deteriorating scores driven by limited effectiveness of management bodies, weaknesses in internal controls, poor data aggregation capabilities and weak outsourcing arrangements.
  • When the ECB assumed its supervisory responsibilities five years ago, it stood at around €1 trillion (8% NPL ratio). By the end of September 2019, the volume of non-performing loans held by significant institutions had been reduced to €543 billion (3.4% NPL ratio).
  • Operational risk driven by specific one off losses and increased IT/cyber risk for a number of significant institutions represents a key area of ongoing focus for supervisors.
  • Overall, the two key risk management processes for capital and liquidity – ICAAPs and ILAAPs – show significant need for improvements, also in light of their role in the SREP which will increase in the future.

Link to ECB Press Release

Link to  Aggregate SREP outcome for 2019

Link to Pillar 2 Requirement

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GLG – Gerson Lehrman Group – Council Member

Parole Povere

About Massimo Famularo

Investment Manager and Blogger Focus on Distressed Assets and Non Performing Loans Interested in Politics, Economics,
This entry was posted in Entering Italian NPL Market, Italian Banks, NPL e Distressed Assets and tagged , , , , , . Bookmark the permalink.

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