It shouldn’t surprise anyone that after a period of relative quietness on the European front, something was bound to happen again. Even though it has been less than six months since Greece had to close its banks in an attempt to stop a bank run, it feels like it has been an eternity as the mainstream media chose not to spend too much attention on a fait-divers like a bank run.
However, as every toddler could have expected, it’s not over yet, oh no, it’s far from over. Now the Greek banks have been (temporarily) been patched up with some additional cash infusions, the European Union will have to use some more fingers to plug a few additional holes in the proverbial dyke. One hole has been plugged but suddenly the alarm bells started to ring again in Euro-land as both Hungary and Portugal are now signaled to be in trouble…
The Portuguese central bank has released the results of a review of its banks and virtually all of the country’s banks will have to boost their Tier 1 ratio’s by 0.25-1% before January 1 2017. Not only did the Central Bank conveniently release these results right in between Christmas and New Year when the trading desks in Europe are virtually empty, it’s also swiping the potential impact on the banks and the financial institutions under the carpet, as it has only released the percentages and not the absolute capital need.
Source: solutions.3m.com.au
At Secular Investor, we had a closer look at Banco Comercial Portugues, the publicly listed bank in Portugal with the largest capital hole. According to the data from the Portuguese central bank, BCP needs to boost its Tier 1 ratio by 0.75%. That sounds like a very moderate amount indicating the bank is almost out of the woods, but you shouldn’t judge this fast. According to the recent financial statements of Banco Millennium BCP, the total risk-weighed assets were 43.5B EUR. As BCP needs to boost its buffers by 0.75%, it needs to find 326M EUR in less than one year. And the clock has started to tick!
Source: Millenniumbcp.pt
But that’s not the biggest issue at hand. According to all of the banks that were subject to the review, their Tier 1 ratio’s were amongst the best of Europe as virtuall all of them already had double-digit Tier 1 ratio’s. Referring to BCP again, the bank claimed to have a CET 1 ratio of 13.2% when it announced its most recent financial results. Theoretically, 13.2% is excellent, so why is the central bank demanding BCP to further increase its Tier 1 capital? Is the 13.2% calculation unreliable? Is the quality of the Tier 1 assets not as good as the bank claims? How trustworthy are the banks’ numbers if the central banks asks them to increase the capital buffers anyway?
Source: ECB
As you can see on the image here above, using the baseline scenario, the ECB estimated BCP would have a sufficient amount of capital to withstand any economic shocks. This baseline study covered a period of 3 years (ending at the end of this year), and as two years have passed without any substantial adverse facts, it’s striking to see the Portuguese central bank is unhappy with the ECB projections…
The longer this charade is continuing, the more dirt that’s being uncovered. And we’re afraid we haven’t seen the bottom of this cesspit yet.
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