COMPREHENSIVE ASSESSMENT: BANKS MUST NOW “GET THEIR HOUSE IN ORDER” TO PREPARE FOR THE ECB’S SUPERVISORY ROLE

• Today’s publication of the Comprehensive Results reinforces the strength of the European banking sector and will be the catalyst that drives M&A in the European banking sector

• However European banks face significant challenge as the sector remains chronically unprofitable and must address their €879bn exposure to non-performing loans

• KPMG calls for banks to “get their house in order” and adapt to the European Central Bank’s Single Supervisory Mechanism, or risk further actions from the regulator

Professional services firm KPMG has welcomed the results of the European Central Bank’s (ECB-POLICY-RATES-82f6314e-6203-420b-bc8b-70a978546822>ECB) Comprehensive Assessment, but has warned of fundamental challenges ahead facing Europe’s banks.

Commenting on today’s results, Stephen Smith, co-head of the AQR taskforce at KPMG said:

“Today’s announcement is a vital, but only the first, step on the path to a sustainable European banking industry. The fact that through the process, over half of the capital raised was attributable to the Asset Quality Review and it identified further adjustments to non-performing exposures, reinforces the need for the Comprehensive Assessment.

“The assessment’s scrutiny of balance sheet and capital position of banks has been of unprecedented rigour and has implemented consistency across key indicators which should build confidence in the balance sheets of European banks. This has been reflected by virtue that the process has identified a €24.6bn shortfall, testament to the €60bn raised to strengthen the bank balance sheets.

“However, profitability remains a major issue. Undoubtedly bank management teams will now be reviewing their business models in a sector that remains chronically unprofitable. Their significant €879bn exposure to non-performing loans and the level of capital required to support those, is a particular area for concern and banks must seek to address this. Not only is this an issue for bank management and their shareholders, but it will also be the ECB-POLICY-RATES-82f6314e-6203-420b-bc8b-70a978546822>ECB’s as their new supervisor.

“Today’s publication of the results will both be a catalyst for industry consolidation, now the majority of banks have engaged in capital raising exercise and we have greater clarity around their financial positions, as well as non-performing loan portfolio sales.”

Commenting on the ECB-POLICY-RATES-82f6314e-6203-420b-bc8b-70a978546822>ECB’s Single Supervisory Mechanism, which is due to come into force from the 4^th November 2014, Francisco Uria, co-head of the AQR taskforce at KPMG said:

“While the Comprehensive Assessment is a foretaste of the detailed data-driven approach the ECB-POLICY-RATES-82f6314e-6203-420b-bc8b-70a978546822>ECB will adopt as Single Supervisor, it has also made it clear that it will also scrutinise certain qualitative measures. This will have fundamental implications for banks, requiring them to ensure that their technology, processes and risk strategies are able to meet ECB-POLICY-RATES-82f6314e-6203-420b-bc8b-70a978546822>ECB’s future requirements.

“Similarly it will continue to benchmark banks against their European, rather than national peers, inevitably therefore challenging previously accepted national approaches. Banks that fail to adapt quickly run the risk that they are faced with low supervisory “scores”, which may in turn lead to supervisory actions, such as capital or liquidity add-ons.”