RBS fails stress tests, Barclays and StanChart stumble over hurdles

30th Nov 2016 07:33

(ShareCast News) - Royal Bank of Scotland has been forced to submit plans to improve its capital position after failing the Bank of England's annual stress tests, while rivals Barclays and Standard Chartered stumbled over some hurdles but not badly enough to require raising new funds.Despite these failings, Governor Mark Carney assured reporters at a press conference that the Bank's Financial Policy Committee felt the UK banking system had sufficient capital to cope with a potential doomsday scenario that the tests modelled.State-owned RBS failed to pass all the requirements of what was a tougher 2016 stress test and has agreed a revised capital plan with the Bank of England's Prudential Regulation Authority to raise at least £2bn of extra cash.The tests, which are carried out annually to ensure banks' balance sheets can cope with hypothetical adverse economic scenarios, found RBS's Common Equity Tier 1 (CET1) ratio on 31 December last year would have been below the required level and that its Tier 1 leverage ratio was also short of the mark, even after the impact of management actions.Carney said RBS had made a lot of improvements to its core business in recent years but still has "legacy issues"."There's misconduct costs, there's impaired assets, they're still working through the so-called non-core assets on which they have made progress." He pointed out that RBS's proposal on Wednesday was "not talking about raising capital, they're talking about reducing certain types of assets and increasing capital through other activities as oppose to going out and raising capital."Lloyds Banking Group and HSBC passed with flying colours, comfortably exceeding the higher capital and leverage thresholds set out for the purpose of the stress test."While the PRA board judged that some capital inadequacies were revealed for three banks, these banks now have plans in place to build further resilience," the BoE said on Wednesday."The FPC judged that, as a consequence of the stress test, the banking system is in aggregate capitalised to support the real economy in a severe, broad and synchronised stress scenario."More severe testsThis year's stress test was designed to be more severe than the tests in 2014 and 2015 and was based around a scenario where there was a synchronised UK and global recession with associated shocks to financial market prices, as well as an independent stress of misconduct costs.The test also judged banks against the Bank's new hurdle rate framework, which held systemic banks to a higher standard reflecting the phasing-in of capital buffers for global systemically important banks.Designed under the Bank's annual cyclical scenario framework, the scenario modelled a hypothetical synchronised global doomsday scenario, with factors such as UK growth and house prices plunging, unemployment spiking, oil prices tanking and growth in Asia and other emerging market economies badly affected.Barclays had a shortfall in its capital ratio but the PRA said the bank had already announced sufficient strengthening of its capital position and so no further action was demanded.Similarly, Standard Chartered was not required to raise extra capital as the PRA concluded that while the bank did not meet its full Tier 1 risk-weighted capital requirement, it had subsequently taken steps to strengthen its capital position.ReactionShares in RBS were down 3.3% to 190.4p just after 0900 GMT on Wednesday morning, StanChart fell initially but regained some ground while the other banks were close to parity.Goldman Sachs analysts said in their view the results "re-affirm the necessity for RBS to settle major outstanding litigation items in order to resume capital return", though it still preferred the state-owned bank and STAN as its sees "scope for re-rating as restructuring and the resolution of legacy issues progresses".Analyst Neil Wilson at ETX Capital said it was "no surprise" that RBS came last stress tests out this morning and it mustering a fresh £2bn in capital was "going to prove very difficult for a bank that is yet to turn a profit some eight years after being bailed out", and the threat of a $12bn fine from US authorities to settle claims it mis-sold mortgage backed securities in the run up to the financial crisis."The bank is still 73% owned by the taxpayer and a return to private ownership looks even further away than ever. It's got to pray that Clydesdale Bank's bid for Williams & Glyn goes through - RBS had wanted £1.9bn for the 315 branches but chances are it will be for a good bit less than that."He added that investors still had to be mindful of risks to financial stability from Brexit and the upcoming Italian referendum, which could send a shockwave through the European and UK banking sector.Mike van Dulken at Accendo Markets said Barclays shares were the standout performer, despite a capital shortfall and being more exposed to investment banking and international."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," he said.