Lloyds Banking Group PLC’s (LON:LLOY) dividend paying capacity should be broadly unchanged for the year after the Bank of England’s stress tests determined that none of Britain’s major lenders will need to raise extra capital, according to analysts.
Lloyds, along with Royal Bank of Scotland Group (LON:RBS), Barclays PLC (LON:BARC), HSBC Holdings (LON:HSBA), Standard Chartered PLC (LON:STAN), Nationwide Building Society and Santander UK PLC (LON:SANB), all passed the central bank’s test for being able to withstand another financial crisis and a “disorderly” Brexit.
READ: Lloyds, RBS, Barclays and HSBC can handle Brexit risks, Bank of England's stress test reveal
The test examined the strength of a bank’s balance sheet against the central bank's capital requirements, including the common equity tier 1 ratio (CET1) and the Tier 1 leverage thresholds.
Preparing for possible 'no-deal Brexit'
The BoE said while it had judged UK banks as being able to support the real economy through any financial shocks resulting from a no-deal Brexit scenario, “a severe global recession and stressed misconduct costs could result in more severe conditions than in the stress test”.
“In such circumstances, capital buffers would need to be drawn down substantially more than in the stress test and, as a result, banks would be more likely to restrict lending to the real economy," it said.
The BoE’s plans to raise the countercyclical capital buffer (CCB) rate to 1% from 0.5% with effect from November 2018. This will not require banks to strengthen their capital positions. However, lenders' surplus capital will need to be incorporated into their regulatory capital buffers.
Lloyds raised its CET1 ratio from 13.6% at the end of 2016 to 14.1% in the third quarter against its target of 13%.
“We think Lloyds’ 13% CET1 ratio target incorporates a management buffer in excess of 100 basis points (bps), so, other things being equal, we think that Lloyds’ dividend-paying capacity in FY17 should be broadly unchanged,” said Investec.
Lloyds will continue to pay special dividends, says SocGen
Societe Generale said it continues to expect healthy special dividends following the tests. It said Lloyds was the “main talking point” of the stress tests as it suffered a drawdown of 4.9%, compared to 2.5% last year, which has led some to believe that its CET1 ratio target may need to rise towards 15%.
“But much of that would be offset by lower stressed conduct costs as we approach the PPI (payment protection insurance claims) deadline, some reduction in Pillar 2A (capital requirements) and risk reduction in the recently acquired MBNA book (credit card business),” SocGen said.
“We expect Lloyds to set a new core tier 1 ratio target of 13.5% or 14% in February next year and continue to expect healthy special dividends.”
Lloyds the 'biggest shock' of stress tests, says Credit Suisse
Credit Suisse said Lloyds was the “biggest shock” in the stress tests since its adjusted drawdown is almost double the level last year and implies a 14.7% end-state CET1 requirement, compared to its 13% target.
“Nevertheless we assume Lloyds reaches 14.7% CET1 by 2019 year-end after dividend per share of 4.5/5.0/5.5p for fiscal years 2017/18/19E respectively, and therefore were 14.7% to be its end-state requirement it would be manageable.”
HSBC and Barclays say Lloyds will need to raise CET 1 ratio
HSBC expects a new CET1 target for Lloyds of about 14% given the fact that its Pillar 2A buffer is going to rise by 50bps to 3% and the BoE’s confirmation that the CCB rate will rise to 1% from November 2018.
“Fortunately Lloyds starts from a strong capital position, generates some 200bp per annum in new CET1 (pre-dividend) and has some time on its side (the systemic risk buffer doesn’t arrive until 2019). So it should be able to meet consensus dividend forecasts and boost its CET1 ratios to the required levels over the next 15 months,” HSBC said.
Barclays Capital analysts said their initial take on the stress tests is that rising regulatory buffers mean that UK banks’ current 13% CET1 ratio targets may not be sufficient and could impact capital distribution.
“On this analysis, of the UK banks that we cover Lloyds would be the most affected with its minimum regulatory requirement potentially rising to a 15% CET1 ratio compared to the company’s current 13% target (revised to 13.5% near-term at 3Q17), although this depends on how the stress test influences the PRA (Prudential Regulation Authority) buffer and how much offset there might be from a reduction in Pillar 2A requirements.”