Buoyed by the recent stress test results, Europe's banks are maintaining the effort to deleverage, but are hampered by slow growth and volatile capital markets. Writer Brian Caplen

The broad story in European banking is one of deleveraging and, tortuous as it is, this is likely to carry on for some time. The challenge is doubly difficult at a time of insipid growth, meaning that last month's news that Germany's second-quarter growth had hit 2.2%, contributing to a 1% overall lift in the eurozone, can be seen as a hugely significant development.

Europe's banks also have the recent EU stress tests behind them and, while there has been criticism of the rigour of the exercise, the broadly positive outcome - only seven of the 91 banks tested failed - is another step on the way to a European banking recovery.

The Banker's ranking of the top 300 EU banks contains some vivid examples of this deleveraging process - Royal Bank of Scotland, which is placed first in the ranking despite all its upheavals, increased its Tier 1 capital by 21.7% and reduced its assets by 21.5%; Barclays, which comes in at number five, raised its Tier 1 capital by 48.2% while lowering its assets by 25.3%; Deutsche Bank in 11th position raised its Tier 1 by 14.6% and reduced the asset book by 29.5%.

The UK's Lloyds Banking Group leads the ranking of top 20 EU banks by Tier 1 increase with a gigantic 285.7% increase to $77,034m, largely as a result of its merger with HBOS, which, in turn, led to the bank ending up 41% owned by the state. This clearly demonstrates that no amount of capital will protect a bank from bad assets. Lloyds' assets rose 161.9% in the ranking, again as a result of the merger.

Greek gains

A number of Greek banks have made impressive gains in their Tier 1 capital - Hellenic Postbank by 104.9%, Attica Bank by 81.5%, Agricultural Bank of Greece by 47.9% - and it is important to emphasise that while the country has financial problems, in general Greek banks have been well managed, although Greece's ATE Bank failed the stress test.

Indeed, in a recent The Banker round table, one of the participants - David Marks, chairman of financial institutions group (FIG) debt capital markets at JPMorgan - said: "Arguably, the Greek banking system was one of the best managed in Europe but, unfortunately, as we know, the state of the country's public finances was not the best in Europe."

In the same discussion, doubt was also cast on the extent of the deleveraging process in Europe. David Soanes, head of FIG capital markets and investment banking in Europe, the Middle East and Africa for UBS, said: "Deleveraging has not occurred. If you believe that asset prices are a function of the leverage in the system, then if there is deleveraging, asset prices are going to come down. If asset prices come down, solvency comes down. So it's a very fine line between deleveraging (and removing the funding problem) and just creating a solvency problem." All the same, figures from The Banker's database provide evidence of shrinking asset books and higher levels of Tier 1.

Top 20 EU banks by Tier 1 capital increase

Top 20 EU banks by Tier 1 capital increase

Change for the cajas

Spain is one country in the firing line as property assets have fallen sharply in value, leaving the country's banks and in particular its savings banks, the cajas, highly exposed.

Five of the seven banks to fail the EU stress test were cajas and, ironically, only a few days after the report appeared, the Spanish savings banks were out on a roadshow to raise more capital. They are able to do this as a result of a new law allowing them to offer 50% of their equity to private investors, whereas previously they were restricted to selling non-voting shares (cuotas participativas). The Spanish government is pushing cajas to merge too, with the aim of reducing the number of players from 45 to 19.

In the top 300 EU banks ranking there are 41 Spanish banks, with two cajas making the top 50: Caja de Ahorros y Pensiones de Barcelona - la Caixa at 21, showing a 15.9% increase in Tier 1 capital, and Caja de Ahorros y Monte de Piedad de Madrid at 28, with a 20.2% increase in Tier 1. One caja makes the ranking for the first time - Ibercaja at 76, which is reported to be open to merger offers even though talks with Caja de Ahorros de la Inmaculada de Aragón broke down in June.

Spanish banks as a sector achieve an impressive fourth place in terms of return on capital behind Malta (20.9%), Poland (20.5%) and Hungary (17.8%). Reiterating the comparatively good showing of Greek banks, they come in 10th in this table with a return on capital of 9.1%. Smaller countries generally seem to fare better than the large economies in this ranking.

Germany is the giant of the top 300 in many ways with 92 banks, representing 30% of the overall sample. Many of these are German savings banks - sparkassen - and three of these enter the ranking for the first time - Sparkasse Zollernalb at 242, Sparkasse Leverkusen at 245 and Sparkasse Hagen at 252nd place. One of Germany's more troubled banks, IKB, is placed high in the Tier 1 capital increases table, reflecting its recapitalisation. Aareal Bank and Deutsche Schiffsbank also appear high in this ranking.

The major obstacle the EU's banks face in the coming months is that the capital markets they need to access in order to recapitalise are highly volatile. Until the markets settle down, deleveraging will be slow.

Top 20 EU new entrants by Tier 1

Top 20 EU new entrants by Tier 1

Return on capital (%)

Return on capital (%)

Where they come from

Where they come from

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