The majority of Europe's biggest listed banks would need to raise significant additional capital if placed in a 100% stress test condition, according to research from AlphaValue. It said 21 out of 31 banks would need to raise a total of €132.8 billion in capital under such conditions if subjected to a worst case economic scenario with a doubling of the current recession magnitude.

Nearly two thirds of this amount relates to six of the largest banks in Europe: HSBC (in need of €23.5 billion), UBS (short of €16.2 billion), Barclays (lacking €15 billion), Dexia (undercapitalised by €13.7 billion, BNP Paribas (lacking €10.1 billion) and Natixis (short €7.2 billion).

Partially nationalised banks such as Lloyds Banking Group and Royal Bank of Scotland as well as banks with an insignificant lending business are not included in the study. AlphaValue also excluded banks with limited operations in Europe such as Standard Chartered and banks without precise data about impairments in the fourth quarter of 2008 and the first quarter of 2009.

Even under current conditions the AlphaValue stress tests revealed that listed European banks need €31.3 billion to reach capital adequacy requirements of 8% Tier 1. AlphaValue identified 10 European banks that would struggle to meet this level of capital.

Tier 1 capital should represent at least 4% of risk-weighted assets but a higher level of approximately 8% has been recently demanded by regulators, rating agencies and markets to cope with unexpected events during a period of crisis.

According to AlphaValue, HSBC and BNP Paribas are among the top six undercapitalised banks due to their high exposure to mortgages and consumer loans. This was aggravated in the case of BNP Paribas as it presented a slight shortage of capital with a Tier 1 capital adequacy ratio of just 7.8% rather than the desired 8%.

AlphaValue said it thinks the level of HSBC and BNP Paribas high-quality credit should allow them to raise the funds if necessary.

Both banks, concluded AlphaValue, have the ability to increase profits by cutting operating expenses or reduce their assets in order to increase capital.

UBS showed a shortfall due to a persistently high level of net trading losses according to the analysis. In Dexia's case there is a "very high level of bond assets with an uncertain value. If Dexia had to sell these assets at January 1, 2009, it would have sustained losses of €12 billion in addition to the record €3.3 billion loss recorded in its 2008 income statement" said Christophe Nijdam, bank analyst at AlphaValue.

"This assumption may seem severe, but the same applies to all of the banks in the sample. In the case of Natixis, this situation is due to liabilities relating to €34 billion of compromised assets coupled with low profitability," he added.

Banks that passed the stress test included Spanish banks Santander and BBVA, Italian bank Mediobanca, German bank, Deutsche Bank and Swedish banks.

"The listed Spanish banks show resilience due to a high earning power base that more than compensates for rising impairment costs, while other banks incurred more reasonable risk costs," commented Nijdam.

The Swedish banks benefited from a reactive central bank that imposed regulatory capital increases early on in the crisis, he noted.

Although Europe-wide stress testing exercises are underway, there are no plans to publish the results. "Stress testing is a long-standing practice undertaken by regulators and banks' internal departments to establish whether banks have enough capital to hold up against economic shocks," concluded Pierre-Yves Gauthier, head of research at AlphaValue.

A high level of vigilance is needed in order to avoid the syndrome of 'things returning to normal', he said.

The stress tests were based on total assets as at December 31, 2008 and were inclusive of regulatory capital raised between January 1 and May 3,1 2009. This was the latest consistent publicly available information for the 31 listed banks reviewed.

Based in Paris, AlphaValue is one of Europe's largest pan-European independent online equity research platforms.

Stress scenarios and Tier 1 level assumptions (at December 31, 2008)