This is your annual reminder that EU bank supervisors are obsessed with asset quality and that I’m running an annual exercise to estimate which banks have not provisioned enough for NPLs. (The crowd goes wild!)(Thread)
The previous years, this exercise has proven to be a reliable predictor of banks that would be in a tough spot….(All based on EBA Transparency Data) - so what's up this year?
First, what’s happening sector-wise? It’s pretty homogenous: loan books are all growing at a similar pace, as you can see below (loan book 2019 vs 2018)
But everything else is shrinking! Less NPL, less equity, less provisions, etc. Basically, this shows that banks have been offloading A LOT of NPLs rather than increasing provisions. Italian GACS played a role there ofc, but it’s a broad-based phenomenon 
The biggest change in the EU banking sector over the past few years has been the immense supervisory pressure to cleanup NPL and increase coverage. This has now stalled:
NPL are still going down, but at a slower pace. Same for the Texas ratio - the coverage ratio is almost unchanged.
But as you all know, aggregate data is not necessarily what matters the most. All what you evil creatures want to know, is if anyone will be going bust soon! And for this, we need to know if a bank has a (large) lack of provisions.
So what’s happening on that front (unlike previous charts, this is not EBA data, but my estimates based on EBA data)? I’ve charted the shortfall from this year vs. last year.
Just in case you’re worried about the big outlier on the top left corner, I’m pretty sure you’ve never heard of this bank, so you’ll survive the shock.
Overall, I estimate that the total shortfall of loan loss provisions is 88bn€. It might sound like a big number, but it was 140bn€ in 2016! And it’s only 0.8% of RWA, 5.7% of CET1, so not a huge amount.
But as you can see on the chart, there are some naughty boys – 3 of them to be more specific! (Don’t ask the names, I won’t tell you.)
Another important metric, I believe, is the total shortfall of banks that have a large shortfall – i.e. the capital need of banks that are in trouble. I now estimate only 9.6bn€ of shortfall for banks with a 2%+ RWA shortfall.
This was 40.4bn just a couple of years ago. Clearly, the drama is gone. Resolution lawyers are weeping. Sorry.
But a few dark clouds remain.
First of all, in Greece. Three Greek banks are still in the Top 10 or worst banks and 2 of them have actually increased their shortfall. Hercules is badly needed…
A few selected banks (e.g. in Malta, Austria) still have too large shortfalls, in my view, but it’s improving - slowly.
All Italian banks have done a good job – except one, & I’m pretty sure it’s not the one you think (the red line corresponds to unchanged shortfall – if you’re below, you improved.)
And I guess the same can be said of Spanish banks – but with even better improvements. And again, the few that did not improve are not the usual suspects.
That’s all folks. In a nutshell, the trend is still good, but less so. Let’s see what 2020 brings, it could be very different!
