Royal Bank of Scotland has emerged as the biggest failure in the UK’s annual stress tests, forcing the state-controlled lender to present regulators with a new plan to bolster its capital position by at least £2bn.
Barclays and Standard Chartered also failed to meet some of their minimum hurdles in the toughest stress scenario ever modelled by the Bank of England, but they were judged to have sufficient capital-raising plans already in place.
The outright failure of RBS — partly caused by heavy litigation costs still hanging over the bank — underlines how it is still struggling to regain a stable footing eight years after being bailed out by the taxpayer in the financial crisis.
It is also a blow to UK government, which wants to start selling down its 73 per cent stake in the bank, and shareholders, who had hoped for the resumption of dividend payments.
RBS had its revised capital plan accepted overnight by the BoE after it suffered the second-highest ever percentage fall in capital under the stressed scenario after the Co-operative Bank in 2014.
RBS shares opened down 2.3 per cent after the news on Wednesday morning.
Overall, the BoE said the results showed the banking system had continued to increase its overall levels of capital and came out of the stressed scenario with stronger balance sheets than in previous years.
RBS, however, was the only bank to fall below the minimum hurdle rate even after “assumed management actions” but before the presumed benefit of converting its loss-absorbing hybrid debt know as alternative tier one (AT1) securities.
In the stressed scenario, RBS’s common equity tier one ratio — a measure of capital to risk-weighted assets that is the main benchmark of banking strength — fell from 15.5 per cent to 5.9 per cent after management actions but before AT1 conversion. That is below its 6.6 per cent hurdle rate and its 7.3 per cent “systemic reference point” — a second, more stretching target set for systemically important banks.
“The stress test demonstrates that RBS remains susceptible to financial and economic stress,” the BoE said. “Based on RBS’s own assessment of its resilience identified during the stress-testing process, RBS has already updated its capital plan to incorporate further capital strengthening actions and this revised plan has been accepted by the PRA board.”
RBS said in a statement that its revised plan was made up of “an array of capital management actions”.
These included “further decreasing the cost base of the bank; further reductions in RWAs [risk-weighted assets] across the bank; further run-down and sale of other non-core loan portfolios in relation to our personal and commercial franchises; reduction in certain non-core commercial portfolios in commercial banking; and the proactive management of undrawn facilities in 2017”.
It added that “additional management actions may be required until RBS’s balance sheet is sufficiently resilient to stressed scenarios”.
Ewen Stevenson, finance director, said: “We are committed to creating a stronger, simpler and safer bank for our customers and shareholders. We have taken further important steps in 2016 to enhance our capital strength, but we recognise that we have more to do to restore the bank’s stress resilience including resolving outstanding legacy issues.”
The BoE said Barclays and StanChart also fell below their hurdle rates before management actions and conversion of AT1 securities. But in Barclays case the regulator was confident that its capital plan — including selling much of its African subsidiary — would be enough to fix its shortfall. In StanChart’s case, it said the bank had recently issued AT1 securities that would resolve its shortfall.
Lloyds Banking Group, HSBC, Nationwide and Santander UK all passed the stress test, which the BoE said hit riskier corporate loans harder than residential mortgage books.
The BoE toughened the tests from the previous two years and introduced higher individual targets for each bank — including an extra hurdle rate for the most systemically important lenders — instead of a standard hurdle rate.
BoE governor Mark Carney said on Wednesday: “We are pleased to see the banks will have resilience consistent with the ability to withstand what’s a very severe shock [modelled in the stress tests]. ‘Withstand’ means to being able to meet the demand for borrowing, for loans, for mortgages in that scenario — so growing lending in this scenario despite being hit with all this shocks. That’s what we want to see.”
He said RBS had made “a lot of progress over the last few years” in its core business of serving UK households and businesses. “Its challenge is that it still has legacy issues, misconduct costs, non-core assets and impaired assets. The orders of magnitude of their plans are much bigger than the size of the shortfall highlighted in the stress test.”
This year the test modelled the impact of a sharp contraction in Chinese and Hong Kong growth, with an overall 1.9 per cent contraction of the global economy, combined with the knock-on effect of emerging market currencies depreciating against the US dollar. It also examined the consequences of a 31 per cent fall in UK house prices over a five-year timeframe.
Steven Hall, banking partner at KPMG, said the banks’ performance was worse than expected. “All banks started this test in a better place than they have previously but this year’s test is the most severe we’ve seen. As predicted misconduct costs have weighed heavy on results.”