Royal Bank of Scotland Group PLC (LON:RBS) is unlikely to fail this year’s UK stress tests again given its progress in cleaning up the bank, RBC Capital Markets said.
The Bank of England will on Tuesday publish stress test results for seven of the UK’s major banks, including RBS, Lloyds Banking Group (LON:LLOY), HSBC Holdings (LON:HSBA), Santander UK (LON:BNC) and Standard Chartered (LON:STAN).
The tests examine whether banks have a strong enough balance sheet to withstand any future financial shocks.
The focus will be on RBS after the government revived plans to sell its stake in the business following its £45.5bn bailout during the 2008-09 financial crisis.
Philip Hammond said on Wednesday the government would sell £15bn of shares before the end of the 2018-19 fiscal year.
The bank, which is still more than 70% owned by the taxpayer, was forced to cut costs and sell assets worth £2bn to plug a capital shortfall after failing last year’s street test.
RBS in better position, says RBC
“RBS soft failed last year's stress test but we see less risk this year due to higher loss absorbency and settling of some litigation,” RBC said.
In April RBS settled with a group of investors over its 2008 rescue fundraising and in October settled with the US Department of Justice (DoJ) over a criminal investigation that accused the bank’s traders of lying to customers over bond prices.
It is still awaiting a potential settlement with the DoJ over claims it mis-sold mortgage bonds in the primary market leading up to the banking crisis.
But RBC thinks the bank is “in a better position than last year” after agreeing in July to pay US$5.5bn to the Federal Housing Finance Agency to settle the second of three major US mortgage-backed securities probes.
Max stressed drawdown in focus for LLoyds
RBC also believes the max stressed drawdown used to set the Prudential Regulation Authority capital requirements for banks will be “particularly important for Lloyds”.
“The max stressed drawdown for Lloyds will likely be watched closely for an indication of where capital targets will increase to at the end of the year,” it said.
It expects Lloyds’ capital target to increase to 13.7%.
“The stress drawdown will help inform the market about the ability for Lloyds to return capital at the end of the year and we do not think the results will impact consensus 2017 dividend of 4.1p (6% yield).”
“If we apply the same max stressed drawdown to the 2016 common equity tier 1 ratios and the new systemic reference points then Barclays, RBS and Standard Chartered all dip below their reference points,” RBC said.
Higher hurdle rates a risk for Barclays
For Barclays, RBC said it sees “some risk” due to higher hurdle rates for global systemically important banks (G-SIBs) in this year's stress test.
However, this will be offset by the fact that like other UK banks its capital ratio is higher than in the last test.
The CET1 - a measure of capital strength for banks - at Barclays was 13.1% at the end of 30 June. At the same time of the year the CET1 for Lloyds stood at 13.5%, post dividend payments, while RBS was at 14.8%.
BoE may raise capital requirements again
The BoE has said it will consider the measures banks have taken to strengthen their capital buffers since the end of 2016.
In July the Bank increased the capital buffer on UK lenders amid concerns about spiralling consumer borrowing.
The counter-cyclical capital buffer (CCB), which limits the amount of debt that private banks can use to fund their balance sheets on top of their normal regulatory buffers, was raised from zero to 0.5%. This meant the aggregate capital requirement of UK banks was effectively raised by £11.4bn.
The BoE signalled that it expects to increase the CCB again to 1% in November.