Europe's banking regulator, the European Banking Authority (EBA), released the highly anticipated results of this year's "stress tests" of Europe's 51 biggest commercial banks late on Friday evening. The results showed that most of Europe's big banks had reasonably healthy balance sheets, and would likely stay solvent even in a sharp economic downturn.

A few, however - including those listed at top - appeared to be financially shaky, with worryingly low core capital ratios.

Analysts expect banks that performed poorly under the stress tests will need extra measures to strengthen their balance sheets, including clearing non-performing loans off their books and raising fresh capital.

"Whilst we recognize the extensive capital raising done so far, this is not a clean bill of health," EBA Chairman Andrea Enria said in a statement on Friday. "There remains work to do."

Germany's biggest banks, Deutsche Bank and Commerzbank, were among the 12 weakest banks as measured by a key indicator: The ratio of common equity Tier 1 capital (CET1) to total risk-weighted assets. However, both banks' CET1 ratios have improved since last year.

Under the EBA's "adverse" economic conditions scenario, Deutsche Bank would have a CET1 ratio of 7.8 per cent at the end of 2018, while Commerzbank would have an CET1 ratio of 7.4.

"This improved result is the fruit of hard work and many small steps forward," said Deutsche Bank chief executive John Cryan. "The stress test shows that the bank is well equipped for tough times." Deutsche Bank said in a statement that it was on track to reach a core ratio of at least 12.5 percent by the end of 2018.

Similarly, Commerzbank chief risk officer Markus Chromik said after the results were announced that his bank is "resilient and resistant to shocks."

The other seven German lenders subjected to EBA's stress tests were projected to have CET1 ratios at the end of 2018 of between 8.3 and 35.4 per cent under the adverse scenario.

In a previous round of stress tests completed last year, the EBA had put 5.5 percent as the minimum CET1 ratio threshold a bank should stay above, though this year it didn't set any such threshold, saying that each bank's portfolio had to be judged in light of its particular risks.

What it's about

The tests used the 51 banks' balance sheets as they stood at the end of 2015 to model how each bank's portfolio of assets and liabilities might fare over a three-year time horizon from 2016-18 under two distinct economic scenarios: A baseline of low but positive European GDP growth, and a higher-stress scenario of two consecutive years of recession followed by a weak recovery.

Most of the banks tested, 37 out of 51, are based in the euro zone and supervised by the ECB, which said the EBA's stress test results reflected progress in repairing balance sheets: "The banking sector today is more resilient and can much better absorb economic shocks than two years ago," said Daniele Nouy, who heads supervision at the ECB.

The detailed stress-test results are not meant primarily to serve as a guide for banking-sector investors. They're intended to help banking supervisors identify risks and problems, and decide what measures are needed to strengthen each bank's balance sheet, in an effort to ensure each bank will stay solvent even in tough economic conditions.

The specific measures to be adopted are decided on a case-by-case basis, following guidelines established under the terms of Europe's new banking union and applied by the European Central Bank's supervisory division or national bank supervisory agencies.

Examples of possible measures aimed at strengthening a bank's balance sheet would be selling off discounted portfolios of distressed debt, reducing over-exposure to types of loans deemed high-risk, such as mortgage lending in overpriced regional markets. Raising fresh money from investors to increase capital buffers against possible future losses, or reducing dividend payouts to investors and retaining a higher proportion of earnings for that same purpose are also options.

Some big banks need balance sheet cleanups

Among the high-lights of the summary results: As anticipated by markets, Italy's troubled lender, Banca Monte dei Paschi di Siena (BMPS) - founded in 1472 and believed to be the oldest continually operating bank in the world - was by far the worst performer in the stress tests.

BMPS sought to get ahead of the poor result with the announcement Friday evening of a 5 billion euro ($5.6 billion) capital increase, negotiated with investors over the past few days.

The money injection from private sources avoids a potentially painful EU rescue of BMPS that would have imposed "bail-ins," or losses, on bondholders and other creditors. The Italian treasury in a statement said it was satisfied with the deal and that no state money would be necessary to help the bank.

When smaller banks not subjected to EBA's stress test are also included, it has been estimated that Italy's banks are struggling under the combined burden of some 360 billion euros ($400 billion) in soured loans. Italy has joined Greece, Cyprus and Portugal as countries whose banks have worryingly high proportions of non-performing loans.

NZ / me (Reuters, DPA, AFP)