Erste’s Treichl Vows to Fix ECB Stress Test Favoring Italy

May 21, 2014 9:37 am ET

(Updates with Moody’s outlook for Austrian banks in eighth paragraph, FMA reaction to Treichl in last.)

May 21 (Bloomberg) -- Erste Group Bank AG, Austria’s biggest lender, said it will fight a “political” design of stress tests favoring banks in Italy and other southern nations over those in healthier economies of eastern Europe.

An exam executed by the London-based European Banking Authority this year will test how well banks can withstand an economic crisis that is the bleakest scenario ever simulated by European regulators. The test, designed by the European Central Bank, simulates a 10.1 percent contraction of the Czech economy, compared with a 6.1 percent hit on Italy’s output.

“Why is the southern European region much less affected than the Czech republic or Croatia?” Chief Executive Officer Andreas Treichl said at Erste’s annual general meeting in Vienna today. “There has been a dramatic political intervention. I don’t want to indulge in fantasies about it, but to me this all seems very illogical and not right, and it will be one of our tasks in the next weeks and months to fix this.”

As the ECB, led by Italian Mario Draghi, prepares to take over supervision of about 130 euro-area lenders from BNP Paribas SA to National Bank of Greece SA, regulators have sought to compile the toughest stress tests in a bid to repair credibility damaged by assessments in 2010 and 2011 that didn’t uncover weaknesses at banks that later failed. The tests are part of a comprehensive assessment of banks that also includes an asset- quality review.

Better Shape

Treichl’s bank owns the biggest lenders in the Czech and Slovak republics and in Romania, the second-largest in Hungary and the No. 3 in Croatia. The Czech and the Slovak economies are in a much better shape than that of most southern European countries and can resist a downturn better, Treichl said.

“Government debt in the Czech republic is much lower than in southern Europe, labor market conditions are much better, investments higher, private debt is at 84 percent, compared to 250 percent in the euro area, the banks’ capital ratios are at 17 percent compared to 12 percent in the EU,” Treichl said. “I see no reason whatsoever why the Czech republic should be hit five times as hard as southern Europe.”

Erste’s shares declined 11 percent this year, making it one of the worst performers in the 43-company Bloomberg Europe Banks and Financial Services Index, which has gained 1.3 percent. They gained 0.8 percent to 22.68 euros by 3:27 p.m. in Vienna today.

Moody’s Negative

Along with Austrian peers UniCredit Bank Austria AG and Raiffeisen Bank International AG, Erste dominates the banking market in most of eastern Europe. Moody’s Investors Service today maintained its negative outlook on Austria’s banking industry, in part because of investments in more vulnerable central and eastern European (CEE) countries such as Russia, Ukraine or Croatia.

“In Austria and export-led CEE countries (i.e., Czech Republic, Poland, Slovakia), we expect asset quality to improve on the back of accelerating economic growth and the low indebtedness levels of corporate and household borrowers,” Moody’s said. “In other CEE markets, including Russia, we expect corporate and retail loan delinquencies to rise.”

The EBA exams will also simulate a 19.2 percent drop in stock prices over three years, as well as a 14.7 percent fall in commercial real estate prices across the 28-nation European Union. The Hungarian forint and Polish zloty will lose a quarter of their value under the most adverse scenario to express losses on mortgage lending in CEE.

Austrian bank regulator FMA said there would be no change to the stress test terms. “Everybody is complaining, hence I think everybody is hit,” co-President Helmut Ettl told reporters today. “It’s published. It’s going to happen.”

--With assistance from Ben Moshinsky in London, Alexander Weber in Vienna and Jeff Black in Frankfurt.