ROYAL Bank of Scotland could be forced into further restructuring after a review by the Bank of England found it may not be able to withstand a severe shock to the UK economy.
Bank of England (BoE) governor Mark Carney yesterday revealed that RBS was one of three banks to fall short on capital adequacy requirements, with an ongoing investigation by the US Department of Justice and RBS’s inability to sell its Williams & Glyn business affecting its score.
Based on a worst-case scenario, the test looked at how banks would cope when faced with a situation where gross domestic product, house values and oil prices plunged at the same time as unemployment spiked.
However, while the BoE said that RBS “remains susceptible to financial and economic stress”, the bank does not have to raise additional capital at this stage.
Instead, RBS has agreed a revised capital plan with the Prudential Regulation Authority that will see it continue to divest itself of riskier assets.
In a note to the stock market, RBS said: “RBS intends to execute an array of capital management actions to supplement the organic capital generation from its core franchises and further improve its stress resilience.
“[This includes] further decreasing the cost base of the bank, further reductions in 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.
“RBS expects its revised capital plan to address the shortfall identified in [the] stress test results.”
However, the BoE noted that “RBS faces a range of costs and risks” that could require further action from the bank, with RBS admitting that “additional management actions may be required until RBS’s balance sheet is sufficiently resilient to stressed scenarios”.
In particular, if the DoJ action, which relates to the selling of mortgage-backed securities in the early 2000s, results in a significant fine or the sale of Williams & Glyn undervalues the business it may have to look at selling further assets to raise capital.
Laith Khalaf, a senior analyst at investment business Hargreaves Lansdown, said: “On the face of it the bank currently has a high capital buffer, but the 2016 stress test reveals that under extremely severe economic conditions, that would quickly be eroded.
“The bank is still in the process of restructuring its business, not to mention spinning off Williams & Glyn, as well as facing potentially hefty misconduct costs in the US, all of which serve to weaken its hand.”
At this stage it is not clear when the DoJ will make its determination on RBS or what level of fine it will impose. However, the bank’s shares took a hit in September when it was announced that Deutsche Bank was fined $14 billion by the DoJ for its role in selling mortgage-backed securities.
In terms of Williams & Glyn, Clydesdale Bank-owner CYBG has confirmed that it remains interested in acquiring the business, which is made up of branches that RBS is required to sell under the terms of its 2008 Government bailout.
However, as RBS has said it will not be able to offload the business by the end of 2017 as required under state aid rules imposed by Brussels, its negotiating position is likely to be weak.
RBS’s shares had fallen by 2.5 per cent to 192p at the opening of trading yesterday. However, despite falling to 187p by mid-morning they had recovered to 194p by the close of business. That represents a fall of 1.5 per cent on the previous day’s close.
Bank of Scotland owner Lloyds Banking Group as well as HSBC, Nationwide Building Society and Santander UK all passed the stress test while Barclays and Standard Chartered were also found to have some issues with capital adequacy.
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