Bank of England gives UK chancellor handy boost with clean bill of health for RBS

The Bank of England (BoE) has given an unwitting boost to UK Chancellor Philip Hammond. Last week, Hammond said he wanted to raise 15 billion pounds ($11.2 billion) to meet fiscal targets by selling the state’s 71 percent holding in Royal Bank of Scotland (RBS). His job has been made easier by the fact that the BoE awarded the bank a clean bill of health in its stress tests.

The BoE’s stress tests were designed to test the banks’ ability to withstand a chaotic exit from the EU. The sector was put through a hellish scenario including a UK economic contraction of 4.7 percent and a one-third fall in residential property prices, but they still kept a common equity Tier 1 capital ratio of 8.3 percent. True, RBS’ capital position fell below the BoE’s “systemic reference point” of 7.4 percent, theoretically meaning more capital is needed. But that was based on its capital position at the start of the year. On current figures, the BoE gave RBS a clean pass. The gold star means RBS is a step closer to resuming dividends for the first time since the financial crisis. The last hurdle is a settlement with the US Department of Justice over accusations of mis-selling mortgage-backed securities, likely next year. A dividend would allow Hammond to tap the large pool of fund managers who oversee income funds, as well as retail punters. Ireland’s state-owned Allied Irish Banks offers a parallel. The lender took a state bailout during the Emerald Isle’s economic bust but announced its intention to restart dividends before the government began selling a 28 percent stake in June this year. Shares have increased by around one-tenth since then.

Hammond may be less happy with the price he gets. RBS shares have risen by 20 percent this year, and currently trade at 0.9 times tangible book value. That looks rich, given the bank is not expected to make a profit next year. The uncertainty of Brexit may keep investors nervous, limiting further upside. Still, given the government’s fraught negotiations with the EU, Hammond can be thankful that at least the country’s banks are ready for Brexit.