2023 EBA Stress Test Results are out – Although results show the second highest capital depletion in stress history, given strong capital positions, remaining buffers and improved profitability, most banks will be able to increase dividends and share buybacks.

1. Results display the second highest capital depletion in EU stress test history.

1. Impact of 2023 EBA Stress Tests shows average capital depletion (2022 CET1 to adverse) of 459 bps, 26bps lower than depletion observed in 2021 EBA Stress Tests (485bps).
2. Higher depletion explained by more severe scenario and higher quality assurance impact estimated at 175bps vs. 100bps average in the past (about of 1/3 of impact driven by ECB quality assurance).
3. Depletion of 459 bps in Europe compares to 250bps and 340bps in US and UK latest stress tests, respectively.
4. As expected EBA Stress Test results do not generate any major surprises and demonstrate strong capital resilience of the banking sector.

2. Banks demonstrate strong resilience to weather a stress due to improved NII and NPL starting positions.

1. No incremental capital needs with only 1 bank falling below the 5.5% old CET1 minimum threshold (La Banque Postale).
2. Capital flexibility (measured as the buffer between CET1 post stress test and minimum threshold of 5.5%) increases to 488 bps from 466bps in 2021.
3. Capital buffers (measured as the buffer between CET1 starting and regulatory SREP plus P2G calculated as a function of stress test depletion) display winner and losers.
4. Stress test results evidence conflicting / opposing views between regulators and banks. The former wanting to restrict further increases in capital distribution via dividends or buybacks due to uncertainty in macro and aftermath of the mini banking crisis. The latter wanting to return more capital due to more favourable interest rate levels, low NPLs and improving business profitability.
5. In our view, regardless high stress test capital depletion and thanks to improving profitability trends in the sector we expect further increases in bank dividend and buybacks.

3. Countries most impacted are those with least income generation capabilities to offset capital depletion.

1. Losing countries defined per largest CET1 depletion are Germany, France and Denmark.
2. Winning countries defined per lowest CET1 depletion are Hungary, Poland and Norway.

4. Stress tests going forward.

1. The ECB Cyber Resilience Stress Test arrives in 2024 expected to target the integrity of the database(s) supporting the main core banking system and simulate loss impact, response and recovery actions undertaken by the Bank.
2. EBA will lead Climate Stress Test 2024 – Fit-for-55 exercise to assess the resilience of the financial sector, focusing on the capacity of the financial system to support the transition to a lower carbon economy, even under conditions of stress.
3. Banks are overall very disappointed with the current dynamics of the quality assurance process of the stress test exercise. The ECB has a pre-established view of each individual bank’s capital depletion and drives quality assurance to deliver on expected stress test outcomes ignoring bank internal results. We think stress test process changes are due as they are becoming irrelevant, inefficient, and inaccurate. Further alignment to internal capital planning processes (ICAAP) and more agile/dynamic scenario setting are required.
4. We also expect regulatory focus on liquidity: 1. Revision of deposit run-off assumptions of LCR and liquidity stress tests; 2. More frequent LCR reporting, 3. multi-scenario stress tests; 4. Combined capital and liquidity stress tests and 5. More capital related to interest rate risk of the banking book (IRBB)

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