E.U. Bank Stress Tests, Kissing the PIIGS (STD, DB, BCS, NBG, AIB, IRE)

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The E.U. bank stress tests are due at 12:00 PM EST today, an interesting time considering that the U.S. will be the only active market. Many of the top banks are lower ahead of the reports, partly on concern that the report may be sandbagged.  Some banks have to fail in theory, and the current concern is around some regional banks in Spain.

Banco Santander, S.A. (NYSE: STD) is not expected to fail the stress test but its ADRs are lower by 1.9% at $12.71 with an implied $110 billion market cap.  Thomson Reuters has some of its own research showing that most of the major banks will pass that stress test.  They were not as concerned with Spain, but Iatly is seen as troubled.

Deutsche Bank AG (NYSE: DB) in Germany and the UK’s Barclays PLC (NYSE: BCS) were also deemed not at risk before the news.  Deutsche Bank’s ADRs are down 1.4% at $63.34 versus a 52-week range of $54.14 to $84.93.  Barclays is down 1.3% at $18.43 versus a 52-week range of $15.36 to $25.68.

The Greek banks are the surprise as reports indicated that the Greek banks will pass the stress tests.  National Bank of Greece SA (NYSE: NBG) was noted this week by CNBC as passing the tests and shares are down 1.4% at $2.79, but this is now up over 30% from the lows of $2.11.

We previously noted that the Ireland downgrade from Moody’s this week may have been an opportunity rather than a new curse.  Allied Irish Banks plc (NYSE: AIB) is down 1% at $2.41 per ADR, but this is still up 17% from the recent low of $2.06. The Bank of Ireland (NYSE: IRE) is off by 1.5% at $3.87 per ADR, but this is still up 25% from the recent low of $3.10.  Long-term is an unknown of course, but these banks are higher in ADR prices than when we covered that downgrade as an opportunity.

Tests are tougher than the U.S. stress tests, but the pre-announcement from the E.U. is already being voted as a watered-down test.  The stress test is based on a once in 20-year scenario.  The tests are not said to include sovereign debt failure or models for much more liquidity risks.  Some measurements also seem to only be on losses on bonds held in trading accounts rather than in the buy-and-hold accounts.  Some of the tests are whether the banks can withstand adverse conditions that are far worse than what had been seen already but do not account for what looked and felt like a scenario that was very close in May and June.

Goldman Sachs research today expects that 10 of the 91 banks under review may not pass the stress tests.  Let’s hope those are a once in 50-year scenario rather than a once in 20-year scenario.

JON C. OGG

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