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BANCO DE PORTUGAL • Results of the comprehensive assessment to banks
Press Release of Banco de Portugal on the results of the
comprehensive assessment of banks
The European Central Bank publishes today the results of the comprehensive assessment of
euro area banks. This assessment included an Asset Quality Review (AQR) and a stress test.
In Portugal, the assessment initially included Caixa Geral de Depósitos, Banco BPI, Banco
Comercial Português and Espírito Santo Financial Group. As a result of the resolution measure
applied to Banco Espírito Santo, it was decided not to include this bank in the disclosure of
results of the comprehensive assessment, given that it would not be possible to timely conclude
this exercise for Novo Banco.
The results of the AQR and the baseline scenario of the stress test (2014-2016) make it
possible to ascertain the resilience of the Portuguese banks covered in the test and show that
they have adequate capitalisation levels. In both cases, all banks register capital ratios above
the threshold of 8%.
Under the adverse stress test scenario, which is deemed unlikely, the Common Equity Tier 1
(CET1) ratio projected for Banco Comercial Português in December 2016 falls short of the 5.5%
threshold. The institution has already identified a set of measures to fully cover the shortfall
detected. These measures shall be incorporated in the capital plan to be submitted to the
European Central Bank, as foreseen in the exercise.
It should be noted that the adverse stress test scenario is particularly severe, given that the
stress test starting point (December 2013) was very unfavourable as a result of the negative
performance of the Portuguese economy in the recent past. Moreover, in the particular case of
BCP, the stress test did not fully reflect the globally positive developments resulting from the
implementation of the restructuring plan negotiated with the European Commission.
1. Comprehensive assessment
In October 2013, the European Central Bank (ECB) announced that it would conduct a
comprehensive assessment of euro area banks, in collaboration with the national competent
authorities responsible for supervision. The assessment was expected to be concluded prior to
the ECB assuming full responsibility for supervision as part of the Single Supervisory Mechanism
on 4 November 2014.
The comprehensive assessment reviewed 130 banks of euro area countries. The objectives of
this exercise were to (i) strengthen banks' balance sheets by repairing the problems identified,
(ii) enhance transparency and improve the quality of information on the condition of the banks
and (iii) build confidence in banks.
The comprehensive assessment included an Asset Quality Review (AQR) and a stress test. These
two exercises were designed in an articulated manner, and the AQR and stress test results were
integrated through the join-up process defined for the purpose.
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BANCO DE PORTUGAL • Results of the comprehensive assessment to banks
Within the AQR, a detailed review was performed of banks' balance sheets as at 31 December
2013, examining whether assets, collateral and the respective provisions were properly valued.
The stress test provided a forward-looking examination of the resilience of banks’ solvency
under two macroeconomic scenarios: a baseline scenario and an adverse scenario. The latter,
although plausible, is unlikely to occur.
2. AQR – Asset quality review
The objectives of the asset quality review (AQR) were to examine whether assets, collateral and
related impairments were properly valued, thus enhancing the level of transparency associated
with banks' exposures.
The AQR focused on the most risky balance-sheet items, selected in accordance with a uniform
methodology and harmonised definitions. This exercise therefore sought to maintain a level
playing field across the different jurisdictions within the Single Supervisory Mechanism (SSM), in
a context where there are still differences among countries as regards the definition of
regulatory capital.
This evaluation delivered, where necessary, a review of the impairments associated with each
bank's exposures. The increase in impairments as a result of the AQR led to the calculation of
adjusted CET1 ratios, allowing for an actual comparison of all 130 banks that are part of the
SSM.
3. Stress test
The stress test assessed the resilience of banks to different macroeconomic scenarios. The
institutions' financial and prudential results were projected on the basis of balance-sheet data
for December 2013, adjusted for the AQR results.
Projections have a three-year time horizon, i.e. up to December 2016. The relevant variable for
the analysis is the CET1 ratio.
The macroeconomic and financial scenarios
The stress test was performed in two different scenarios. The baseline scenario was prepared by
the European Commission and reflected the then official macroeconomic projections.
The adverse scenario was set by applying deviations from the baseline scenario stemming from
low-probability shocks, albeit plausible, with an impact on the macroeconomic and financial
variables. These shocks corresponded to the materialisation of the main systemic risks: an
increase in global government bond yields; a further deterioration in credit quality in economies
with feeble aggregate demand and still vulnerable banking systems; stalling reforms raising
concerns on the sustainability of public finances; and the lack of necessary balance sheet repair
to maintain affordable market funding.
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BANCO DE PORTUGAL • Results of the comprehensive assessment to banks
The scenarios for Portugal
The baseline scenario of the stress test assumed a gradual recovery in economic activity in
Portugal.
The adverse scenario incorporated particularly severe assumptions, including:



A protracted recession period in the Portuguese economy, with a cumulative reduction
in economic activity of more than 10%, over the 2011-16 period;
A projected unemployment rate for 2015 of more than 18%, with only a slight decline in
the following year;
A significant increase in long-term government debt yields, with an impact on the
economy’s financing and the valuation of banks' debt securities portfolios.
Both scenarios assumed a substantial reduction in housing prices: around 10% in the baseline
scenario and 20% in the adverse scenario (in cumulative terms).
Compared with the latest projections, only the GDP growth rate for 2014 is identical to that
foreseen in the baseline scenario. Developments have been more favourable in variables for
unemployment, government bond yields and housing prices. Given such developments, the
adverse scenario projections, which are much more severe than those for the baseline
scenario, are much less likely to materialise.
Main variables of the macroeconomic and financial scenarios
Baseline scenario
GDP at constant prices (annual rate of change (%))
Unemployment (as a % of labour force)
Long-term interest rates (ten-year Treasury bonds (%))
Residential property prices (annual rate of change (%))
2014
08
16.8
5.1
-5.6
Portugal
2015
15
16 5
5.4
-3.9
2016
1.7
14 5
55
-1 3
European Union
2014
2015
2016
1.5
2.0
1.8
10.7
10.4
10.1
29
3.2
3.3
09
2.7
3.8
Adverse scenario
GDP at constant prices (annual rate of change (%))
Unemployment (as a % of labour force)
Long-term interest rates (ten-year Treasury bonds (%))
Residential property prices (annual rate of change (%))
2014
-0.8
17.2
7.4
-9.3
2015
-2.3
18 2
7.1
-7.5
2016
-1.1
17.4
72
-4.6
2014
-0.7
11.3
4.4
-7.9
2015
-1 5
12 3
4.3
-6 2
2016
0.1
13 0
4.4
-2.1
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BANCO DE PORTUGAL • Results of the comprehensive assessment to banks
Methodology
The stress test was performed under a general static balance sheet assumption. Under this
assumption, balance sheet items remain constant (as at December 2013) and the financial
instruments are replaced at maturity, keeping the same characteristics.
Exceptions were granted to this assumption, albeit within certain limits, in the case of banks
with restructuring plans agreed with the European Commission before 31 December 2013
within the scope of capitalisation operations through public investment. Banco Comercial
Português and Caixa Geral de Depósitos are in this situation.
In the exercise, the projection for the net interest income was conditioned by constraints
regarding funding costs and the intensity with which banks can pass on the increase in funding
costs to lending rates. For banks under the static balance sheet assumption, the net interest
income could not increase in relation to the starting point (2013). Other income and cost items
were also restricted by the value recorded at the starting point or by historical values of these
variables.
The assumptions of the exercise were particularly stringent for banks whose starting point of
the stress test exercise coincided with a particularly adverse year, as was the case for
Portuguese banks. Indeed, Portuguese banks recorded in 2013 the worst results of recent
history, resulting from the adverse macroeconomic context.
On the one hand, the net interest income of Portuguese banks has been squeezed by low
interest rates. On the other hand, the increase in credit default and the inspections carried out
by Banco de Portugal, in the context of the Economic and Financial Assistance Programme, led
to the recognition of very high impairment for credit risk.
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BANCO DE PORTUGAL • Results of the comprehensive assessment to banks
4. Results of the comprehensive assessment
BPI – Banco BPI
The result of the comprehensive assessment of Banco BPI makes it possible to conclude that this
bank is resilient under both scenarios.
The AQR exercise resulted in the calculation of a 15.2% CET1 ratio, i.e. 12 basis points below the
ratio presented by Banco BPI as at 31 December 2013, but higher than the threshold of 8% set
for the AQR.
In the baseline scenario, the CET1 ratio projected for Banco BPI for December 2016 is 14.9%, i.e.
0.4 percentage points lower than in December 2013, standing above the threshold set for the
baseline scenario of the stress test (8%).
In the adverse scenario, the ratio projected for December 2016 is 11.6%, i.e. 3.7 percentage
points lower than in December 2013, standing above the threshold set for the adverse scenario
of the stress test (5.5%).
BANCO DE PORTUGAL • Results of the comprehensive assessment to banks
Developments in the CET1 ratio – BPI
Baseline scenario
16
14
12
%
10
8
6
4
2
0
Dec. 2013
Impact of
the AQR
Dec. 2013
post-AQR
Capital/
CoCos
Profit and
loss and
Reserves
Deductions
and
transitional
arrangements
RWA
Dec. 2016
Adverse scenario
16
14
12
%
6
10
8
6
4
2
0
Dec. 2013
Impact of
the AQR
Dec. 2013
post-AQR
Capital/
CoCos
Profit and
loss and
Reserves
Deductions
and
transitional
arrangements
RWA
Dec. 2016
Note: Columns in grey correspond to the CET1 ratio as at December 2013, before and after the AQR results, and December 2016.
Positive/negative contributions to developments in the ratio are shown in green/red. The column “Capital/CoCos” refers to capital
increases and reimbursement of hybrid instruments; the column “Profit and loss and Reserves” refers to cumulative profit and loss
and changes in reserves; the column “Deductions and transitional arrangements” refers to deductions from own funds in accordance
with the CRR/CRD IV and respective transitional arrangements; the column “RWA” shows the impact on the ratio of changes in
capital requirements.
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BANCO DE PORTUGAL • Results of the comprehensive assessment to banks
Main results – Banco BPI, S.A.
Actual figures as of 31 December 2013
Mill. EUR, %
Common Equity Tier 1 (CET1) (1)
3,317
Risk weighted assets (1)
21,711
CET1 ratio, %
15.3%
Figures as of 31 December 2013 after the asset quality review
Mill. EUR, %
Impact of the asset quality review on Common Equity Tier 1 (CET1)
Common Equity Tier 1 (CET1) (1)
-27
3,291
Risk weighted assets (1)
21,710
CET1 ratio, %
15.2%
Outcome of the baseline scenario as of December 2016
Mill. EUR, %
734
3 yr cumulative operating profit before impairment
3 yr cumulative impairment losses on financial and non-financial assets in the
banking book
399
4
3 yr cumulative losses on the trading book
Common Equity Tier 1 (CET1) (1)
3,258
Risk weighted assets (1)
21,845
CET1 ratio, %
14.9%
Outcome of the adverse scenario as of December 2016
Mill. EUR, %
650
3 yr cumulative operating profit before impairment
3 yr cumulative impairment losses on financial and non-financial assets in the
banking book
1,040
3 yr cumulative losses on the trading book
10
Valuation losses due to sovereign shock after tax and prudential filters
206
Common Equity Tier 1 (CET1) (1)
2,558
Risk weighted assets (1)
22,058
CET1 ratio, %
11.6%
Basis
2
Points
Mill. EUR
to threshold of 8% for AQR adjusted Common Equity Tier 1 (CET1) ratio
0
0
to threshold of 8% in baseline scenario
0
0
to threshold of 5.5% in adverse scenario
0
0
Aggregated Capital Shortfall of the Comprehensive Assessment
0
0
Capital shortfall
(1) Transitional arrangements in accordance with the CRR/CRD IV as per reporting date. Figures as of 31 December 2013 computed
as of first day of application: 1 January 2014.
(2) RWA used corresponds to relevant scenario in worst case year.
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BANCO DE PORTUGAL • Results of the comprehensive assessment to banks
CGD – Caixa Geral de Depósitos
The result of the comprehensive assessment of CGD makes it possible to conclude that this bank
is resilient under both scenarios.
The AQR exercise resulted in the calculation of a 10.4% CET1 ratio, i.e. 44 basis points below the
ratio presented by CGD as at 31 December 2013, but higher than the threshold of 8% set for the
AQR.
In the baseline scenario, the CET1 ratio projected by CGD for December 2016 is 9.4%, i.e. 1.5
percentage points lower than in December 2013, standing above the threshold set for the
baseline scenario of the stress test (8%).
In the adverse scenario, the ratio projected for December 2016 is 6.1%, i.e. 4.8 percentage
points lower than in December 2013, standing above the threshold set for the adverse scenario
of the stress test (5.5%).
BANCO DE PORTUGAL • Results of the comprehensive assessment to banks
Developments in the CET1 ratio – CGD
Baseline scenario
12
10
%
8
6
4
2
0
Dec. 2013
Impact of
the AQR
Dec. 2013
post-AQR
Capital/
CoCos
Profit and
loss and
Reserves
Deductions
and
transitional
arrangements
RWA
Dec. 2016
Impact of
the AQR
Dec. 2013
post-AQR
Capital/
CoCos
Profit and
loss and
Reserves
Deductions
and
transitional
arrangements
RWA
Dec. 2016
Adverse scenario
12
10
8
%
9
6
4
2
0
Dec. 2013
Note: Columns in grey correspond to the CET1 ratio as at December 2013, before and after the AQR results, and December 2016.
Positive/negative contributions to developments in the ratio are shown in green/red. The column “Capital/CoCos” refers to capital
increases and reimbursement of hybrid instruments; the column “Profit and loss and Reserves” refers to cumulative profit and loss
and changes in reserves; the column “Deductions and transitional arrangements” refers to deductions from own funds in accordance
with the CRR/CRD IV and respective transitional arrangements; the column “RWA” shows the impact on the ratio of changes in
capital requirements.
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BANCO DE PORTUGAL • Results of the comprehensive assessment to banks
Main results – Caixa Geral de Depósitos, S.A.
Actual figures as of 31 December 2013
Mill. EUR, %
Common Equity Tier 1 (CET1) (1)
6,929
Risk weighted assets (1)
63,885
CET1 ratio, %
10.8%
Figures as of 31 December 2013 after the asset quality review
Mill. EUR, %
Impact of the asset quality review on Common Equity Tier 1 (CET1)
-281
Common Equity Tier 1 (CET1) (1)
6,651
Risk weighted assets (1)
63,870
CET1 ratio, %
10.4%
Outcome of the baseline scenario as of December 2016
Mill. EUR, %
1,009
3 yr cumulative operating profit before impairment
3 yr cumulative impairment losses on financial and non-financial assets in the
banking book
1,145
165
3 yr cumulative losses on the trading book
Common Equity Tier 1 (CET1) (1)
6,100
Risk weighted assets (1)
64,910
9.4%
CET1 ratio, %
Outcome of the adverse scenario as of December 2016
Mill. EUR, %
403
3 yr cumulative operating profit before impairment
3 yr cumulative impairment losses on financial and non-financial assets in the
banking book
3,395
3 yr cumulative losses on the trading book
289
Valuation losses due to sovereign shock after tax and prudential filters
98
Common Equity Tier 1 (CET1) (1)
3,982
Risk weighted assets (1)
65,419
6.1%
CET1 ratio, %
Basis
2
Points
Mill. EUR
to threshold of 8% for AQR adjusted Common Equity Tier 1 (CET1) ratio
0
0
to threshold of 8% in baseline scenario
0
0
to threshold of 5.5% in adverse scenario
0
0
Aggregated Capital Shortfall of the Comprehensive Assessment
0
0
Capital shortfall
(1) Transitional arrangements in accordance with the CRR/CRD IV as per reporting date. Figures as of 31 December 2013 computed
as of first day of application: 1 January 2014.
(2) RWA used corresponds to relevant scenario in worst case year.
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BANCO DE PORTUGAL • Results of the comprehensive assessment to banks
BCP – Banco Comercial Português
In the case of BCP, the AQR exercise resulted in the calculation of a 10.3% CET1 ratio, i.e. 197
basis points lower than the ratio presented by BCP as at 31 December 2013, but higher than the
threshold of 8% set for the AQR.
In the baseline scenario, the CET1 ratio projected by BCP for December 2016 is 8.8%, i.e. 3.4
percentage points lower than in December 2013, standing above the threshold set for the
baseline scenario of the stress test (8%).
In the adverse scenario, after incorporation of the AQR results, the ratio projected for December
2016 is 3.0%, i.e. 9.3 percentage points lower than in December 2013 and below the 5.5%
threshold.
The institution has already identified a set of measures to fully cover the shortfall, which will
now be incorporated in the capital plan to be submitted to the European Central Bank as
foreseen in the exercise.
It should be noted that, in the specific case of BCP, the stress test did not fully reflect the
globally positive developments resulting from the implementation of the restructuring plan
negotiated with the European Commission, or to take into consideration measures that the bank
might adopt should the adverse scenario actually materialise.
BANCO DE PORTUGAL • Results of the comprehensive assessment to banks
Developments in the CET1 ratio – BCP
Baseline scenario
12
%
10
8
6
4
2
0
Dec. 2013
Impact of
the AQR
Dec. 2013
post-AQR
Capital/
CoCos
Profit and
loss and
Reserves
Deductions
and
transitional
arrangements
RWA
Dec. 2016
Adverse scenario
12
10
8
%
12
6
4
2
0
Dec. 2013
Impact of
the AQR
Dec. 2013
post-AQR
Capital/
CoCos
Profit and
loss and
Reserves
Deductions
and
transitional
arrangements
RWA
Dec. 2016
Note: Columns in grey correspond to the CET1 ratio as at December 2013, before and after the AQR results, and December 2016.
Positive/negative contributions to developments in the ratio are shown in green/red. The column “Capital/CoCos” refers to capital
increases and reimbursement of hybrid instruments; the column “Profit and loss and Reserves” refers to cumulative profit and loss
and changes in reserves; the column “Deductions and transitional arrangements” refers to deductions from own funds in accordance
with the CRR/CRD IV and respective transitional arrangements; the column “RWA” shows the impact on the ratio of changes in
capital requirements.
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BANCO DE PORTUGAL • Results of the comprehensive assessment to banks
Main results – Banco Comercial Português, S.A.
Actual figures as of 31 December 2013
Mill. EUR, %
Common Equity Tier 1 (CET1) (1)
5,569
Risk weighted assets (1)
45,559
CET1 ratio, %
12.2%
Figures as of 31 December 2013 after the asset quality review
Mill. EUR, %
Impact of the asset quality review on Common Equity Tier 1 (CET1)
Common Equity Tier 1 (CET1) (1)
-896
4,667
Risk weighted assets (1)
45,502
CET1 ratio, %
10.3%
Outcome of the baseline scenario as of December 2016
Mill. EUR, %
2,770
3 yr cumulative operating profit before impairment
3 yr cumulative impairment losses on financial and non-financial assets in the
banking book
1,425
225
3 yr cumulative losses on the trading book
Common Equity Tier 1 (CET1) (1)
4,001
Risk weighted assets (1)
45,277
8.8%
CET1 ratio, %
Outcome of the adverse scenario as of December 2016
Mill. EUR, %
1,665
3 yr cumulative operating profit before impairment
3 yr cumulative impairment losses on financial and non-financial assets in the
banking book
3,149
3 yr cumulative losses on the trading book
337
Valuation losses due to sovereign shock after tax and prudential filters
-60
Common Equity Tier 1 (CET1) (1)
1,356
Risk weighted assets (1)
45,321
3.0%
CET1 ratio, %
Basis
2
Points
Mill. EUR
to threshold of 8% for AQR adjusted Common Equity Tier 1 (CET1) ratio
0
0,00
to threshold of 8% in baseline scenario
0
0,00
to threshold of 5.5% in adverse scenario
251
1,137
Aggregated Capital Shortfall of the Comprehensive Assessment
251
1,137
Capital shortfall
(1) Transitional arrangements in accordance with the CRR/CRD IV as per reporting date. Figures as of 31 December 2013 computed
as of first day of application: 1 January 2014.
(2) RWA used corresponds to relevant scenario in worst case year.