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Morgan Stanley: Stress tests will not act as the catalyst for additional capital for Greek banks

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Morgan Stanley is optimistic that Greek banks will not need additional capital after the stress tests are concluded. As it says in a report, the 2015 tests revealed an €11bn capital need, yet with the economy on better footing and CET-1 ratios ~500bps higher we do not see this next wave as the catalyst for more capital. 

The European Banking Authority (EBA) will formally launch the 2018 EU-wide stress test on 31 January 2018 at 5pm UK time. Along with the announcement, the EBA will publish the common macroeconomic scenarios for this exercise. Morgan Stanley says that it understands from the banks that they will be submitting data each month until the tests are expected to be completed by early May. «We understand there is no pass/fail threshold and that the results of the exercise will be an input to the SREP capital requirements (12.25-13% currently)».

he comprehensive assessment conducted in 2015, consisting of a stress test and Asset Quality Review, identified a capital need of ~€11bn at Greek banks and resulted in a subsequent capital increase across the four systemic banks. The adverse scenario at that time was particularly negative, calling for a 7.5% fall in real GDP over the three-year stresstest period. 

As it happens, organ Stanley writes, the economy outperformed even the baseline scenario in 2015 and 2016 with employment and house price trends of particular note. As we look to the 2018 tests, we see the key positives as a more stable macro and better outlook than before (e.g. the EC forecasts 2.5% real GDP growth in 2018 and 2019), higher provision buffers (+5.7p.p NPE coverage since 1H15) and strengthened capital position (+500bps additional CET-1 capital on average, ranging from 3.5% at Eurobank to 5.8% at Piraeus). Risks remain around stress test assumptions, such as the trend in real estate / collateral valuations given the current NPE reduction process, yet all in, we believe it is unlikely that these tests act as the catalyst for additional capital.
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