Banks in the Nordic region would emerge far stronger from a major economic downturn than those in other European countries, an S&P Global Market Intelligence analysis of the European Banking Authority's 2021 stress test results shows.

Europe's banking watchdog on July 30 published the results of the stress test, which assessed the health of 50 banks, covering 70% of the EU banking sector, under potentially severe economic conditions until 2023. An adverse scenario considered the consequences of a prolonged COVID-19 pandemic as well as a "lower for longer" interest rate environment, with EU GDP contracting by a cumulative 3.6% between 2021 and 2023, and unemployment rising by 4.7 percentage points.

Under the adverse scenario, Nordic banks would record losses of €1.08 billion on average in 2021. However, the banks would return to profitability in 2022 and 2023, with average income of €120.55 million and €279.82 million, respectively.

In contrast, the non-Nordic EU banks tested are estimated to make losses of €2.97 billion, €203.51 million and €239.03 million in 2021, 2022 and 2023, respectively, on average.

Nordic banks would also fare better than their European peers in terms of capital reserves. The average common equity Tier 1 ratio for lenders in the region was 18.23% at 2020-end, which would drop to 14.28% in 2023 under adverse conditions, implying a capital depletion of 3.95%.

Non-Nordic EU banks' average CET1 ratio would fall to 11.06% from 16.07% in the same scenario, representing a capital depletion of 5.01%.

The resilience of Nordic banks has led countries in the region to begin reinstating countercyclical capital buffer requirements amid a recovery from the worst financial impacts of the pandemic.

The stress test found that European banks would suffer a total capital depletion of €265 billion under the adverse scenario, leading to a drop in the aggregate CET1 ratio to 10.16% on a fully loaded basis, compared to 15.01% at 2020-end under a baseline scenario.

Ireland's banking sector would be the worst affected in Europe in terms of capital depletion under the adverse scenario.