RBS fails the Bank of Eng­land ‘stress test’

RBS needs $2.49 bil­lion in ad­di­tional cap­i­tal

Kuwait Times - - BUSINESS -

Royal Bank of Scot­land (RBS) will cut costs and sell as­sets to boost cap­i­tal lev­els, it said yes­ter­day af­ter fail­ing this year’s Bank of Eng­land stress test, which warned of a “chal­leng­ing” out­look for Bri­tain’s fi­nan­cial sys­tem. State­backed RBS rushed out a state­ment af­ter the re­sult an­nounce­ment to say it would take a range of ac­tions to make up the cap­i­tal short­fall iden­ti­fied by the tests of around 2 bil­lion pounds ($2.49 bil­lion).

The bank’s shares were down 2.3 per­cent at 192 pence by 0901 GMT. The un­ex­pected re­sult un­der­lines the litany of prob­lems with which RBS is grap­pling, in­clud­ing a mount­ing le­gal bill for mis­con­duct be­fore the 2008 fi­nan­cial cri­sis and dif­fi­cul­ties sell­ing off as­sets such as its Wil­liams & Glyn bank­ing busi­ness. An­a­lysts said the re­sult would fur­ther de­lay RBS’s abil­ity to start re­turn­ing cap­i­tal to share­hold­ers.

“We ex­pect RBS will an­nounce fur­ther re­struc­tur­ing at its full-year re­sults, likely dash­ing any hopes for ex­cess cap­i­tal re­turns,” Jef­feries an­a­lyst Joseph Dick­er­son said in a note. The lender said it had agreed a plan of ac­tion with the Pru­den­tial Reg­u­la­tion Au­thor­ity (PRA), the Bank of Eng­land’s en­force­ment arm, that should mean it does not have to tap mar­kets to raise the money. “RBS has agreed a re­vised cap­i­tal plan with the PRA to im­prove its stress re­silience in light of the var­i­ous chal­lenges and un­cer­tain­ties fac­ing both the bank and the wider econ­omy,” the bank said. RBS is ex­pected to set­tle soon with US au­thor­i­ties over its al­leged mis-sell­ing of mort­gage backed se­cu­ri­ties in the run-up to the fi­nan­cial cri­sis.

Bar­clays also fell short by some mea­sures but will not have to sub­mit a new cap­i­tal-rais­ing plan be­cause it has al­ready an­nounced steps to strengthen its de­fences, the BoE Fi­nan­cial Pol­icy Com­mit­tee (FPC) said. Stan­dard Char­tered missed the test’s min­i­mum Tier 1 cap­i­tal tar­get but also es­capes the need for new cap­i­tal-rais­ing mea­sures be­cause of steps al­ready be­ing taken. The per­for­mance of the seven len­ders tested was worse than many mar­ket participants had ex­pected. “This is the high­est av­er­age fall in CET1 (a mea­sure of cap­i­tal) and lever­age ra­tios we’ve seen in the his­tory of a UK con­cur­rent stress test,” said Steven Hall, bank­ing part­ner at KPMG. This year’s health check, the third so far by the Bank of Eng­land since the 2007-09 fi­nan­cial cri­sis forced tax­pay­ers to bail out len­ders such as RBS, was the tough­est yet, with sce­nar­ios combining shocks to both global and do­mes­tic economies.

Bri­tain’s fi­nan­cial sys­tem faces el­e­vated risks from leav­ing the Euro­pean Union and mar­ket vo­latil­ity af­ter the US elec­tion, the Bank of Eng­land said. HSBC, Lloyds Bank­ing Group, Na­tion­wide and San­tander UK did not re­veal any cap­i­tal in­ad­e­qua­cies in the test, the cen­tral bank said. Bri­tain’s bank­ing sys­tem un­der­went a se­vere real-life test in June when mar­kets and ster­ling plum­meted in re­sponse to Bri­tain’s vote to leave the Euro­pean Union.

RBS said that it needs an ex­tra per­cent­age point of cap­i­tal, equat­ing to about 2 bil­lion pounds, which could be achieved by fur­ther as­set sales rather than tap­ping mar­kets. The lender’s new cap­i­tal plan has al­ready been ac­cepted by the PRA.

The level of cap­i­tal in the UK bank­ing sys­tem was sat­is­fac­tory, the Bank of Eng­land said, at 13.5 per­cent of risk-weighted as­sets and the need for RBS and Bar­clays to raise their cap­i­tal hold­ings does not al­ter the over­all pic­ture. “The Fi­nan­cial Pol­icy Com­mit­tee judged that, as a con­se­quence of the stress test, the bank­ing sys­tem is in ag­gre­gate cap­i­tal­ized to sup­port the real econ­omy in a se­vere, broad and syn­chro­nized stress sce­nario,” the FPC said.

The Bank of Eng­land also gave more de­tail on a sec­ond stress test that will be in­tro­duced next year along­side its an­nual check, say­ing that it will cover a seven-year pe­riod-com­pared with five in the ba­sic test-and look at “se­vere head­winds” chal­leng­ing prof­itabil­ity. Banks could be re­quired to change their busi­ness mod­els to make them more sus­tain­able as they face a pro­longed pe­riod of low in­ter­est rates and un­cer­tainty over Bri­tain’s fu­ture re­la­tions with the Euro­pean Union af­ter it leaves the bloc.

“Changes to busi­ness mod­els as the UK with­draws from the EU could have im­pli­ca­tions for re­silience,” the cen­tral bank said. The Bank of Eng­land is now de­vel­op­ing a sys­tem-wide test to as­sess the dy­nam­ics of broader mar­kets un­der stress and will con­duct an in-depth as­sess­ment of risks from de­riv­a­tives trades. The FPC also pub­lished yes­ter­day an as­sess­ment of in­sur­ers’ in­vest­ment ac­tiv­i­ties, con­clud­ing that changes are needed to the EU’s Sol­vency II in­sur­ance rules. — Reuters

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