Lloyds shares fall after narrowly passing European banking stress tests

Shares in Lloyds Banking Group fell more than 2% on Monday after it passed European stress tests by a narrow margin.

About one in five European banks failed regulatory stress tests, which looked at how their balance sheets would cope in a sudden economic downturn. Shares fell as much as 18% for some Italian lenders that failed the tests.

The FTSE 100 initially climbed 50 points as investors breathed a sigh of relief after all UK listed banks received a clean bill of health in the European Banking Authority’s stress tests, which were published on Sunday. London shares later slipped into negative territory, with the FTSE 100 down about five points, at 6383.

Other European markets were lifted by the news, with France’s CAC 40 and the German Dax each gaining 0.9%. The Eurostoxx banking index was up 1.7%

Shares in Italy’s oldest bank, Monte dei Paschi di Siena, were suspended after falling 15% after the EBA revealed it was one of nine Italian institutions to fail the tests. Monte dei Paschi was warned it needed an extra €2bn (£1.65bn), the biggest capital shortfall among banks, just months after raising €5bn. Shares were also suspended in Genoa-based Banca Carige, after its stock fell 18% as investors reacted to the announcement it would have to raise €500m.

Michael Hewson of CMC Markets said Monte dei Paschi seemed like a bottomless pit: “With the Italian economy continuing to contract, and 18% of the bank’s loans being problematic, it is hard to envisage a scenario where the bank won’t end up like Oliver and coming back and asking for more.”

By contrast, Germany’s Commerzbank gained 9% and Austria’s Raiffeisen was up 7.3%, after passing the tests.

The EBA looked at how banks’ balance sheets would cope with a rise in unemployment, falling economic growth and falling house prices. A total of 24 banks failed the tests and were called upon to raise a total of €25bn more capital.

Although no UK banks were among them, bailed-out Lloyds beat the threshold by a narrow margin. While the EBA called for a 5.5% capital ratio – the key measure of financial strength used by the EBA – Lloyds came in at 6.2%, ahead of RBS on 5.7%, but behind Barclays (7.1%) and HSBC (9.3%).

Lloyds claimed its capital ratio would have been 9.6%, if the regulator had not assumed the costs of divesting TSB branches would be recurring.

Analysts raised concerns that Lloyds could struggle to pass the UK’s own, tougher, stress tests, run by the Prudential Regulatory Authority, which are due in December.

Sandy Chen of Cenkos Securities said the UK stress tests would be harder for Lloyds to pass, as they would be based on a bigger fall in house prices.