By Max Colchester and Margot Patrick
The Bank of England on Tuesday said all but one of the U.K.'s
major banks passed a balance-sheet health check but warned that two
of the nation's biggest lenders needed to improve their capital
levels.
The U.K.'s first public stress tests were billed as a watershed
moment for the British banking industry, which has struggled
through six years of balance sheet restructuring following the
financial crisis.
U.K. bank shares rallied on the news that only one lender--the
Co-operative Bank--had to present new plans to strengthen its
balance sheet. Part state-owned Royal Bank of Scotland Group PLC
and Lloyds Banking Group squeaked through the test but have already
put in place sufficient plans to raise their capital levels, the
U.K. regulator said.
Bank of England Governor Mark Carney said the test showed that
British banks were "significantly more resilient" than last year.
But analysts questioned the relevance of the exercise which focused
largely on modeling the effects of a domestic housing crash. On
Tuesday Bank of England policy makers were quizzed about a new set
of investor concerns: the impact of falling commodity prices and a
slowdown in emerging market growth--a factor that could weigh
heavily on Asia-focused HSBC Holdings PLC and Standard Chartered
PLC.
"The Bank of England has clearly flagged a bunch of macro risks
that are playing out today that were not central to the stress
tests done this year," analysts at Sanford C. Bernstein said in a
note.
With the effects of the financial crisis ebbing, U.K. regulators
hailed an annual stress test as a good way to judge its vast
banking sector's robustness.
For the first such test, the central bank's Prudential
Regulation Authority put eight U.K. lenders through a hypothetical
three-year economic collapse where interest rates rise sharply,
U.K. gross domestic product falls to 3.5% below its fourth-quarter
2013 level and commercial real-estate prices slump 30%. To pass the
test banks had to maintain a 4.5% ratio of capital to risk adjusted
assets throughout the period.
The regulator had previously warned that if banks only just pass
the test, they could still be required to take action to bolster
their balance sheets. RBS eked through with a capital ratio of 5.2%
and would have normally been asked to submit a revised capital
plan, the PRA said. However, the 80% state-owned lender already
agreed a new restructuring plan with the PRA this year. Lloyds,
which passed with a ratio of 5.3%, is generating capital and so
doesn't need to provide a new plan either. The Co-operative Bank
flunked the test and agreed to further shrink its mortgage book,
the PRA said.
HSBC and Standard Chartered were the two strongest performers.
Given the test's U.K. focus, "internationally-oriented UK banks not
surprisingly do better," analysts at Citi wrote in a note. The PRA
test included the scenario of a global economic contraction already
used in an EU-wide test in October, but didn't specifically assess
banks' emerging-market loan books. This was despite the fact that
lenders, including Standard Chartered, are facing rising bad loans
following a commodity price crash.
The British banks broadly welcomed the stress test results and
some announced asset sales. RBS said it sold an Irish real-estate
portfolio for GBP1.1 billion ($1.72 billion), while Standard
Chartered announced its biggest asset disposal in years, with the
sale of its PrimeCredit consumer finance units in Hong Kong and
Shenzhen.
The Bank of England acknowledged that the stress-testing system
is still a work in progress. The central bank raised questions
about the banks' ability to crunch a large amount of data for the
test. It also said banks need to do more to ensure they correctly
evaluate the riskiness of their assets and have the infrastructure
and personnel to work on the tests.
It also criticized some of the bankers' willingness to interact
with the regulator. "Answers to queries from Bank staff were often
incomplete and, in a number of instances, the nature of the
interactions fell below the standards set out in the Discussion
Paper," the Bank of England said in the results.
The U.K. regulator has yet to adopt the U.S. stress test model,
where banks are penalized if they fail to correctly compile data.
"As time goes on we may become a little less tolerant," said Mr.
Carney.
Write to Max Colchester at max.colchester@wsj.com and Margot
Patrick at margot.patrick@wsj.com
Access Investor Kit for Standard Chartered Plc
Visit
http://www.companyspotlight.com/partner?cp_code=P479&isin=GB0004082847
Access Investor Kit for HSBC Holdings Plc
Visit
http://www.companyspotlight.com/partner?cp_code=P479&isin=GB0005405286
Access Investor Kit for Lloyds Banking Group Plc
Visit
http://www.companyspotlight.com/partner?cp_code=P479&isin=GB0008706128
Access Investor Kit for Royal Bank of Scotland Group Plc
Visit
http://www.companyspotlight.com/partner?cp_code=P479&isin=GB00B7T77214
Access Investor Kit for HSBC Holdings Plc
Visit
http://www.companyspotlight.com/partner?cp_code=P479&isin=US4042804066
Access Investor Kit for Lloyds Banking Group Plc
Visit
http://www.companyspotlight.com/partner?cp_code=P479&isin=US5394391099
Access Investor Kit for Royal Bank of Scotland Group Plc
Visit
http://www.companyspotlight.com/partner?cp_code=P479&isin=US7800976893