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European banks in aggregate achieve satisfactory US stress test results

The US units of eight European banks assessed under severe hypothetical conditions in the 2018 US stress tests passed the quantitative aspects with flying colours. The qualitative objection to DB USA’s capital plans was anticipated and caused few ripples.

In a brief report, Scope Ratings highlights that Deutsche Bank’s US stress-test result should not impact its current ratings, despite the ongoing negative market sentiment.

“DB USA Corp does not represent the bulk of DB US operations and the Negative Outlook in place on DB AG’s rating already reflects, among other considerations, headline risks related to the Group’s activities in various geographies,” said Chiara Romano, senior analyst in the bank rating team at Scope.

As for the other European banks stress-tested, all results were positive. “For BBVA and Santander, the results are satisfactory. They performed solidly in the quantitative stress tests; Santander in particular maintaining one of the highest solvency ratios among the 35 banks subjected to the tests,” said Marco Troiano, executive director in the banks team at Scope Ratings.

“The results show once again that business model matters: BBVA and Santander are retail banks, principally having to manage balance-sheet credit risk. Trading losses even in the stressed scenario are limited.”

Pauline Lambert, executive director in the banks team at Scope Ratings, noted the positive results for Credit Suisse and Barclays. “Overall, their results were reassuring as both have been restructuring, and their investment banking/capital markets activities remain under investor scrutiny,” Lambert said.

For HSBC, management has acknowledged the low profitability of the US business: improving returns was listed as a strategic focus in bank’s recent update. For the first time last year under the CCAR, HSBC was able to distribute dividends to the parent and will be able to do so again this year.