Fitch: Banks Need More Capital Than Stress Test Shows

More than one third of investors ranked investment grade financials as facing the greatest refinancing challenge over the next 12 months, according to Fitch Ratings‘ quarterly fixed income investor survey. The survey also suggest that banks in countries whit the largest debt problems will need more capital than the stress test results show.

“The publication of the results of the EU bank stress tests on 23 July was potentially a critical event in terms of trying to restore investor confidence in many European banks.”

James Longsdon


Fitch Ratings quarterly fixed income investor survey shows that European investors are becoming increasingly concerned over the ability of the region’s banks to refinance their maturing debt. The survey closed on 23 July – just before the results of EU bank stress tests were announced. But concern remains.

“More than one third of investors ranked investment grade financials as facing the greatest refinancing challenge over the next 12 months,” says Monica Insoll, Managing Director in Fitch’s Credit Market Research group.

The proportion of respondents expecting banks to face the greatest refinancing challenge rose to 36% from 8% recorded in Fitch’s Q210 survey conducted in April.

Banks ranked second behind developed market (DM) sovereigns in terms of investor refinancing concerns.

“The publication of the results of the EU bank stress tests on 23 July was potentially a critical event in terms of trying to restore investor confidence in many European banks,” says James Longsdon, Managing Director in Fitch’s Financial Institutions team.

“The major European banks that ‘passed’ the tests with ease should now be better placed to continue with their re-financing programmes following the dramatic contraction in public debt issuance in May,” Longsdon says.

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More Capital Needed

“Fitch’s concern remains the impaired access to the debt markets of various banks located in countries where the market’s sovereign concerns have been most acute. It seems likely that such banks might need to raise more than the EUR3.5bn capital shortfall identified in the tests in order to regain debt market confidence,” Longsdon adds.

Survey participants also pointed to funding access being the main risk to banks’ credit quality, ahead of other factors such as the macro economy and the withdrawal of stimulus and quantitative easing programmes.

Investor expectations on fundamental credit conditions for investment grade financials also worsened, with 35% fearing deterioration compared with 23% in the latest survey.

Split View

Respondents gave a mixed message regarding views on the impact of regulatory reform proposals.

While all agreed this would lead to changes in structure of the banking industry, there was an even split as to whether the impact would be “considerable” or “limited.”

On a positive note, investment grade financials moved to the top slot for most favoured investment choice, with 21% of investors picking this asset class, on par with speculative grade and ahead of emerging market corporates (14%), Fitch Ratings says in a statement.

Investors signalled intensified concern over developed‐market sovereign issuers, with the proportion expecting significant credit deterioration nearly doubling to 19%. More broadly, the total share of respondents anticipating deterioration (74%) remained in the 70%‐80% range which has prevailed since early 2009, according to the survey.

“In an apparently paradoxical shift in sentiment, worries about most other assetclasses declined further. An unusual level of homogeneity was displayed across investment‐grade, speculative‐grade and emerging markets, with improvement believed likely by 44%‐54% of respondents. The outlook for structured finance remains more cautious, with only 33% expressing such optimism.”

“Fitch notes that this increased optimism for more risky assets appears to be linked to a hunt for yield. Recent funds flow data shows that inflows to high yield and emerging bond funds were substantially greater than flows to investment grade corporate bond funds between January 2009 and April 2010 (according to iBoxx, JP Morgan and iShares). However, the recent market volatility may result in reduced allocations to high yield and emerging markets debt in the context of increased risk aversion,” the analysts writes.

Here a copy of the full report; European Senior Fixed Income Investor Survey Q210.

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