London: Royal Bank of Scotland (RBS) will cut costs and sell assets to boost capital levels, it said on Wednesday after failing this year’s Bank of England stress test, which warned of a “challenging” outlook for Britain’s financial system.
State-backed RBS rushed out a statement after the result announcement to say it would take a range of actions to make up the capital shortfall identified by the tests of around £2 billion (Dh9.2 billion, $2.49 billion).
The bank’s shares were down 2.3 per cent at 192 pence by 0901 GMT.
The unexpected result underlines the litany of problems with which RBS is grappling, including a mounting legal bill for misconduct before the 2008 financial crisis and difficulties selling off assets such as its Williams & Glyn banking business.
Analysts said the result would further delay RBS’s ability to start returning capital to shareholders.
“We expect RBS will announce further restructuring at its full-year results, likely dashing any hopes for excess capital returns,” Jefferies analyst Joseph Dickerson said in a note.
The lender said it had agreed a plan of action with the Prudential Regulation Authority (PRA), the Bank of England’s enforcement arm, that should mean it does not have to tap markets to raise the money.
“RBS has agreed a revised capital plan with the PRA to improve its stress resilience in light of the various challenges and uncertainties facing both the bank and the wider economy,” the bank said.
RBS is expected to settle soon with US authorities over its alleged mis-selling of mortgage backed securities in the run-up to the financial crisis.
Barclays also fell short by some measures but will not have to submit a new capital-raising plan because it has already announced steps to strengthen its defences, the BoE Financial Policy Committee (FPC) said.
Standard Chartered missed the test’s minimum Tier 1 capital target but also escapes the need for new capital-raising measures because of steps already being taken.
The performance of the seven lenders tested was worse than many market participants had expected.
“This is the highest average fall in CET1 (a measure of capital) and leverage ratios we’ve seen in the history of a UK concurrent stress test,” said Steven Hall, banking partner at KPMG.
This year’s health check, the third so far by the Bank of England since the 2007-09 financial crisis forced taxpayers to bail out lenders such as RBS, was the toughest yet, with scenarios combining shocks to both global and domestic economies.
Britain’s financial system faces elevated risks from leaving the European Union and market volatility after the US election, the Bank of England said.
HSBC, Lloyds Banking Group, Nationwide and Santander UK did not reveal any capital inadequacies in the test, the central bank said.
Britain’s banking system underwent a severe real-life test in June when markets and sterling plummeted in response to Britain’s vote to leave the European Union.
RBS said that it needs an extra percentage point of capital, equating to about 2 billion pounds, which could be achieved by further asset sales rather than tapping markets.
The lender’s new capital plan has already been accepted by the PRA.
The level of capital in the UK banking system was satisfactory, the Bank of England said, at 13.5 per cent of risk-weighted assets and the need for RBS and Barclays to raise their capital holdings does not alter the overall picture.
“The Financial Policy Committee 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,” the FPC said.
The Bank of England also gave more detail on a second stress test that will be introduced next year alongside its annual check, saying that it will cover a seven-year period — compared with five in the basic test — and look at “severe headwinds” challenging profitability.
Banks could be required to change their business models to make them more sustainable as they face a prolonged period of low interest rates and uncertainty over Britain’s future relations with the European Union after it leaves the bloc.
“Changes to business models as the UK withdraws from the EU could have implications for resilience,” the central bank said.
The Bank of England is now developing a system-wide test to assess the dynamics of broader markets under stress and will conduct an in-depth assessment of risks from derivatives trades.
The FPC also published on Wednesday an assessment of insurers’ investment activities, concluding that changes are needed to the EU’s Solvency II insurance rules.