RBS Fails Bank Of England Stress Tests Again – ValueWalk

The Bank of England has published it’ annual stress test results for the UK’s largest banks today. The results basically confirm what most investors already know; after years of capital raisings, cost cutting and regulation, most banks are well positioned to weather and financial storm, although RBS is still a basket case.

RBS Fails BoE Stress Tests Again

RBS’s common equity Tier 1 capital ratio plunged by ten percentage points in the BoE’s stressed scenario to 5.5% before management actions to conserve financial buffers. Each percentage point in RBS’s CET1 ratio is equivalent to about £750 million of capital, meaning the bank was almost £2 billion short of its systemic reference point at its low point. The systemic reference point is a higher threshold placed on banks that have significant influence in the global financial system. The basic hurdle rate required all the banks to retain capital equivalent to 4.5% of their assets weighted by risk, plus Pillar 2A — a requirement that varies depending on the specific risks for each bank.

Bank Of England Stress Tests
Photo by James Mitchell

The stressed scenario imposed by the central bank is a five-year scenario, which sees UK house prices would diving 31% and unemployment rising to 9.5%, while China would suffer a recession and oil prices plunge to $20 a barrel. Under the scenario, £44 billion of capital is wiped out in the first two years, five times the losses incurred during the depths of the financial crisis and in the years after, £48 billion of costs are incurred to pay fines and legal fees.

Two other banks, Barclays and Standard Chartered, also struggled in the so-called stress tests but both are currently progressing with plans to raise capital buffers.

Analysts take on the result of stress tests

Here’s what the analysts are saying about the results:


“RBS failed to meet its individual common equity Tier 1 capital or Tier 1 leverage hurdle rates, measures of its financial resilience, before additional Tier conversion. After the additional conversion, RBS still didn’t meet its CET1 systemic reference point, or its Tier 1 leverage ratio hurdle. However, the Bank of England said that RBS already has updated its capital plan, which the central bank will continue to monitor.

Barclays failed to meet its CET1 systemic reference point before additional Tier 1 conversion, but the Bank of England said that in light of Barclays’ already announced capital strengthening plans, it has not required the bank to submit a revised capital plan.

Standard Chartered met its hurdle rates and systemic reference points, but did not meet its Tier 1 minimum capital requirement. The Bank of England said in the light of steps Standard Chartered is already taking to strengthen its capital, it has not required the bank to revise its capital plans.

HSBC Holdings, Lloyds Banking Group, Nationwide Building Society and Santander UK did not reveal any capital inadequacies in the test.”

Michael van Dulken Accendo Markets:

“While RBS was hit most in the summer EBA test and came off worst again this morning, all capital shortfalls identified at RBS, BARC and STAN are being dealt with already. Only RBS requires further monitoring but, more importantly, it doesn’t need to raise more capital, it needs only to keep shedding risky assets. It is also news that things aren’t even worse under such a doomsday scenario that is keeping RBS shares from holding the FTSE wooden spoon. Their 3.7% fall is less than that of CPI whose shares have broken below 8yr support at 550p. While a weak showing is understandable, along with small gains for LLOY and HSBC and small losses for STAN, the overall impact is rather measured, likely thanks to Carney’s early intervention.

However our standout performer this morning has to be BARC posting minimal losses of 0.2% despite a capital shortfall and being more investment banking and internationally exposed. Then again remember this is all based on stress tests started in March, when the world was a very different place. I wonder what things will look like next year when the BoE stresses for a bad Brexit scenario and all the other political risk events we face across Europe.”

Ian Gordon Investec:

“Lloyds (Buy) and HSBC (Sell) achieve “clean” passes and we expect to see a modestly positive response today. In our view, Barclays (Hold) and Standard Chartered (Sell) were almost as good as “clean” passes. Barclays missed its CET1 systemic reference point before AT1 conversion, while Standard Chartered missed its minimum Tier 1 requirement (inc Pillar 2A). However, in both cases, no revisions to capital plans are required, and many of the “remedies” in relation to further AT1 issuance, non-core run-off and RWA reduction have already taken place. Barclays is paying only a “token” 3p dividend in 2016/17; STAN has yet to determine when its dividend can restart.

So, RBS “stands alone” and given the sheer scale of ongoing repair work, this is unsurprising. It continues to boast a notionally strong CET1 capital ratio of 15.0% at Q3 2016, yet it “failed” the stress test. Under the adverse scenario, its CET1 ratio fell to just 5.5%. This result improves to 6.7% post conversion of AT1s and after the impact of strategic management actions, but is still a “fail” vs a 7.1% systemic reference point. RBS is committed to launching a fresh cost plan with the FY16 results, as well as further balance sheet reduction. £10.4bn of RWA reduction has been achieved YTD. It will not be raising fresh capital.”

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