EBA Stress tests
At the end of July, the EBA released the results of its 2021 stress tests. Banks performed very well with an end-point 10% CET1 ratio even after assuming circa EUR 300 billion of credit losses after an already tough 2020. Another positive is that under the ECB’s baseline scenario, bank CET1 ratios were estimated to rise by 50 bps by 2023 to 15.8%. Overall, it was a strong showing from the sector, demonstrating its ability to remain strong in a scenario of a far-fetched tail event. The macro scenario test assumption was particularly tough, with a decline in GDP in the adverse scenario of 1.5%, 1.9% and 0.2% starting from end-2020 that was already impacted by Covid-19. That scenario is tougher than 2018 with a cumulative GDP loss versus a normal scenario of 12.9% meaning a prolonged recession post-Covid-19 without the recovery. This scenario also includes a lower-for-longer rates scenario which of course pressures bank earnings. All of this highlights the resilience of the sector to both the real-life stress test of Covid-19 and the EBA assumptions.
Prior to and in line with the results of the stress tests, the ECB announced its decision to remove the cap on dividend payments for European banks. While this is more of an equity story, it did have a positive impact on Rabobank 6.5% securities. The bank was not allowed to pay last year’s coupon of 6.5% in cash (due to the restriction and despite the fact that Rabobank is one of the strongest banks in Europe), but fully compensated investors by paying in kind. This was an excellent outcome for bondholders. So far this year, the bank has only been allowed to pay a coupon of 2.2% (due to the cap) and following this announcement by the ECB, Rabobank has confirmed it will pay the additional 4.3% in December, as well as resume normal distributions in 2022. This was positive for the securities, which rose several points after the news.