Europe's Banks Back To Health?
Wednesday, August 04, 2010

Despite the return to profitability of some of Europe's leading banks, one hedge fund boss is betting against five of the region's banks in the belief that all is not as rosy as it seems in the banking garden.

With HSBC, BNP Parisbas and UBS all having announced results which beat market's predictions, Pedro de Noronha, chief executive of London-based Noster Capital, contends that the banking sector is far from out of the woods yet and that the problems linked to European sovereign debt, which rocked the markets some weeks ago, haven't gone away.

"Two months ago everybody was in a panic about the sovereign debt crisis, and now it's like everybody is going on holiday and everything is fine," he was quoted as saying by the Daily Telegraph.

De Noronha, a former JP Morgan vice president, suggested that the recent results of the stress test on the European banking industry had also lulled people into a false sense of security regarding the health of the sector.

The EU-wide stress test was conduced by the Committee of European Banking Supervisors in conjunction with national regulators and the European Central Bank. The exercise included 91 European banks, representing 65% of the European market in terms of total assets, and at least 50% in each country. Germany’s Hypo Real Estate, the Agricultural Bank of Greece and five Spanish savings banks all failed the test, but the overall results suggest that the European banking industry is fit to withstand a future economic shock. However, according to de Noronha, the stress test was not nearly hard enough. "The definition is to test something till the point it breaks," he told Reuters. "The fact they only stress tested trading books - who are we kidding?"

The German Bundesbank emphasized that, in its opinion, the assumptions for the macro-economic shock in the EU stress scenarios, which assumed an aggregate 3% deviation in EU gross domestic product compared to the EC’s forecasts over the two-year time horizon, were more severe than those used in the stress tests conducted in the United States in the first half of 2009. The US stress test assumed a growth deviation of 2.9% from that predicted and ten out of 19 banks failed the test, although it was conducted at a time when the banking sector was still recovering from the financial crisis.

Barclays Bank, which is expected this week to announce better-than-expected first half results, is one of the banks that de Noronha says he is selling short. The other banks include Switzerland's UBS, Italy's Intesa Sanpaolo and UBI, and Spain's BBVA.

De Noronha also warned that a vulnerable property market, particularly in the US, still posed a major risk to the banking sector, with many banks still exposed to low-quality mortgages there.

US real estate prices have been moving steadily upwards in recent months, according to Standard & Poor’s Case-Shiller home price index, which recorded a 1.3% rise between April and May. But persistently high unemployment across the US is weighing heavily on the market, and figures from RealtyTrac show that foreclosure rates are still rising, albeit at a slower rate than previously. The withdrawal of a valuable tax credit for first-time homebuyers may also help to dampen demand.