ECB clarify SREP add-on; positive for EU Banks

The ECB last week, in several statements, took the opportunity to clarify bank capital requirements.

We think this was a conscious effort to provide a higher degree of certainty to the market, post the aggressive bank sell-off earlier this year. The Director-general at ECB micro-prudential supervision, Mr. Korbinian Ibel, stated that ‘All things being equal, the capital requirements we have now we find satisfying’, Bbrg 19 February, and in addition, ECB published their SREP methodology, saying that Pillar2 add-ons could be reduced to off-set the phase-in of the Capital Conservation Buffer (CCB). The ECB also reiterated their view (in-line with EBA’s May and December 2015 statements) that the MDA trigger point include all Pillar2 add-ons.

Although the ECB announcement contained little new information, the clarity is positive for bank equity, trading at 0.8x TBV, 2016E (full EU bank universe). Most importantly, verbal statements and ECB’s presented methodology (to offset a higher CCB with a lower SREP addon) give investors better certainty that the CET1 targets banks’ guide for are indeed relevant. EU Bank sector FL B3 CET1 was 11.7% in Q4 vs a target of c11.9%, showing the sector is overall ok capitalised. A number of banks are still below their hurdle, but we estimate the shortfall at a manageable cEUR40bn (c50bp), equal to c1 year of free cash flow. There is still uncertainty on the level of RWA inflation that banks face, which we calculate at 8-13% (equal to an 120bp CET1 headwind). A bullish interpretation of ECB’s more dovish stance is that any RWA inflation could be offset by a lower SREP add-on. For the debt market, the inclusion of Pillar 2 add-ons in the MDA trigger was already priced in (CS’ CoCo index widened by 80bp YTD). In addition, the ECB’s view on removing the mandatory restriction on AT1 coupons if a bank is loss-making is helpful for the CoCo market.

We are selective in the sector and favour (reasonably priced) names that can sustain regulatory capital headwinds and a prolonged period of low interest rates: Intesa (TP EUR3.3), Danske (TP DKK221) and Erste (TP EUR32.0) all rated Outperform. We note the banks benefitting more from ECB’s clarified capital requirements are names perceived as less well capitalised, Unicredit (TP EUR4.6), Santander (TP EUR4.4), DB (TP EUR20.0), BBVA (TP EUR6.9), all rated Neutral. Among least preferred names are DNB (TP NOK91) and SHB (TP SEK94), both rated Underperform.

Equity Research – Credit Suisse