The Bank of England’s stress tests on UK banks will be “most important” for Lloyds Banking Group PLC (LON:LLOY) and Barclays PLC (LON:BARC), according to Credit Suisse.
The central bank’s tests, which determine whether banks have a strong enough balance sheet to withstand financial shocks, will be published on Tuesday. Credit Suisse said it thinks Lloyds will pass the test even with an estimated 100 basis point (bps) loss from its consumer loan book, including credit card business MBNA.
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The key takeaway for Lloyds, however, will be the extent to which a net drawdown implies a Pillar 2B capital requirement to ensure it has adequate capital to manage risks.
Credit Suisse estimates Lloyds’ end-state minimum common tier equity 1 (CET1) ratio requirement – another measure of capital - is 13.2%, including 3.4% available to absorb stress losses.
“Were the net drawdown to be significantly above 3.4% this could put pressure on our 13.5% assumption,” the financial services firm said.
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Meanwhile, Barclays could be affected by litigation after refusing to settle with the US Department of Justice last year over allegations of fraud in the sale of residential mortgage bond securities (RMBS).
However a 6.3% drawdown capacity, including the additional tier 1 (AT1) capital, is 120 basis points higher than last year, equivalent to £4.5bn.
Credit Suisse expects lower litigation stress for Royal Bank of Scotland
On Royal Bank of Scotland Group PLC (LON:RBS), which failed last year’s stress tests, Credit Suisse expects a 140bps decline in capacity to be mitigated by lower litigation stress after the lender set aside a US$3.3bn provision for outstanding fines by the DoJ for mis-selling RMBS.
Regardless of the outcome, Credit Suisse does not expect any change to the company’s CET1 target of 13%.
HSBC Holdings PLC (LON:HSBA) looks well placed with a capacity of 7%, including AT1, compared to 2.8% drawdown last year, Credit Suisse said, adding that it does not expect the bank to fail the stress test or for it to impact management’s 13% CET1 target.