APB PRESS RELEASE - ECB's Comprehensive Assessment

28th October, 2014

The results of the European Central Bank's Comprehensive Assessment were announced on 26/11/2014. The assessment was conducted by the ECB and the bank supervisory authorities in the euro area countries between November 2013 and October 2014.

The Comprehensive Assessment complied with EU Regulation 1024/2013, which grants the ECB special powers for prudential supervision of euro area credit institutions as of 4 November 2014.

It was performed prior to the ECB becoming the maximum supervisor of the euro area. It constituted an unprecedented evaluation of the quality of the assets and solvency levels of the system's 130 financial institutions that will fall under the European Central Bank's direct supervision. The four largest Portuguese banks– Caixa Geral de Depósitos (CGD), Banco Comercial Português (BCP), Novo Banco and Banco Português de Investimento (BPI) - were assessed. Novo Banco's ECB assessment was postponed until 2015 for reasons known to all.

Associação Portuguesa de Bancos (APB) has always supported and closely monitored the assessment, which it considers extremely important to financial stability in the European banking sector.

The Comprehensive Assessment was divided into two stages.

The first was the Asset Quality Review (AQR), which appraised the 130 banks' assets. For the first time, it used standardised methods and harmonised criteria. It covered exposure to credit and market risk, all exposure to domestic and foreign risks, all categories of assets, exposure to foreign debt and restructured loans. It is an objective review consisting of a strict assessment of banks' assets at a particular moment in time. It does not depend on hypotheses or more or less serious scenarios.

The second stage comprised the Stress Tests, which project the banks' starting point as at 31.12.2013 into 2014, 2015 and 2016. They also assess their capacity to absorb shocks in two hypothetical situations called the baseline scenario. It imagines the performance of macroeconomic variables (unemployment, product growth) and market variables (long-term interest rates, e.g. 10-year treasury bonds, home prices) on the basis of current estimates that assume that economic activity will gradually recover. The other, the adverse scenario, is designed to test the bank's resilience in a severe crisis (with slumps in growth, rising unemployment, sharp increases in long-term interest rates and a fall in property prices).

The APB would like to point out the challenge posed by the assessment to all the financial institutions involved and to the Portuguese banks in particular, given their initial difficulties resulting from the tough macro and microeconomic framework that Portugal had been experiencing since 2010.
The fact that the test was conducted on the basis of the banks' balance sheets as at 31.12.2013 adversely affected the Portuguese banks. 2013 showed the worst results in recent decades due to the recession, which resulted in loan defaults, devaluation of assets, reporting of impairments (losses), increases in provisions and a reduction in net interest income.

Furthermore, the three Portuguese banks that underwent the Comprehensive Assessment had increased their solvency levels with state intervention (via share capital increases or issues of CoCos). They were also still implementing the first phase of the restructuring plans required by the state in return for its aid.

In spite of these disadvantages, the three banks passed the AQR comfortably, with Common Equity Tier 1 (CET1) capital ratios above the required 8% minimum, thereby confirming the quality of their assets and the soundness of their provision policies.

The three Portuguese banks also easily exceeded the minimum CET 1 capital of 8% (December 2016) in the Stress Test baseline scenario. BPI and CGD both exceeded the minimum 5.5% CET 1 ratio for the end of 2016 in the adverse scenario. BCP's CET 1 ratio was 3%, which means that it must submit a recapitalisation plan within the established time limit to deal with the equity deficit revealed by the scenario. Nonetheless, the Board of Directors of Millenniumbcp considers that, as a result of its performance in the first nine months of 2014, as reported to the market in its accounts for the third quarter, and measures with an impact on capital implemented in 2014, the need for capital identified in the tests has already been met. There are therefore no plans for share capital increases or forced sale of strategic assets.

The APB feels that in the present circumstances the assessment of the three Portuguese banks was highly positive and showed the huge effort that they had been making to maintain appropriate levels of capital and provisions during the crisis and contribute to the funding and financial stability of the economy.

The APB trusts these new forms of bank supervision to guarantee improvements and continuation of the quality and soundness of the European financial system.

Portuguese Banking Association