The two-part review forms one pillar of the ECB’s effort to rekindle confidence in the euro zone after half a decade of financial turmoil. ECB President Mario Draghi has said banks need to fail to prove the losses of the past have been dealt with. After two previous European stress tests didn’t reveal problems at lenders that later failed, the ECB has staked its reputation on getting this exercise right.

“The numbers are consistent with our expectations,” said Alberto Gallo, head of European macro-credit research at Royal Bank of Scotland Group Plc in London. “It’s too early to say the exercise is credible. The key will be to see how much stress the strong banks will take, and how many of them will pass by a narrow margin.” He expects 11 banks will need to plug capital gaps after measures already taken this year.

 

Eoin Treacy's view

The ECB continues to make abundant liquidity available at the discount window to the Eurozone’s banking sector but investors are still unconvinced that it is has been set back on a sound footing not least because of Banco Espirito Santo’s nationalisation in the summer. While the focus on attention will be on the banks most likely to fail the ECB’s stress test, it is worth highlighting those exhibiting relative strength since they are likely to be the eventual winners from what remains a long drawn out ordeal. 

Italy’s Intesa Sanpaola found support last week in the region of €2 and the 200-day MA and a sustained move below that level would be required to question medium-term scope for additional upside. 

France’s Natixis shares a similar characteristic and has rallied back to test the upper side of a six-month range. 

Credit Agricole has a similar pattern.

A number of banks outside the Eurozone are also notable for their outperformance. 

The UK’s Royal Bank of Scotland is rallying back to test the upper side of a two-year range and continues to hold a progression of higher reaction lows. 

Swedbank broke out of a yearlong range today to hit new all-time highs. 

Norway’s DNB also reasserted its medium-term uptrend today.