U.K. banks including Royal Bank of Scotland Group Plc and Lloyds Banking Group Plc (LLOY) may avoid the need to sell new shares to bolster their balance sheets after the Bank of England used more lenient rules than those advocated by European regulators.
Lenders were yesterday told they need to raise 25 billion pounds ($38 billion) of additional capital, of which they have already laid out plans to cover about half. By targeting a core Tier 1 capital ratio of 7 percent by the end of 2013, rather than the 10 percent by 2019 required by the Basel Committee on Banking Supervision, firms don’t need to raise as much. Government-owned RBS and Lloyds have already sold assets to help bolster their balance sheets.
“They’ve chosen a core Tier 1 ratio that’s quite generous,” said Gary Greenwood, an analyst at Shore Capital Ltd. in Liverpool, England. “The problem is they still need the banks to lend, and the U.K. government doesn’t want to put more money in. If these were all still shareholder-owned businesses they’d be told to have rights offers.”
Britain’s lenders have been selling units and detailing plans to bolster their businesses since the central bank said in November it was concerned they hadn’t fully recognized future loan losses and may be using inappropriate risk models to assess how much capital they hold. BOE Governor Mervyn King said the shortfall “is not an immediate threat to the banking system” and won’t require additional government investment in banks. RBS and Lloyds received a total of about 65.5 billion pounds of taxpayer aid during 2008 and 2009.
“The go-to capital ratio appears to have been lowered,” Citigroup Inc. analysts including Andrew Coombs wrote in a note to clients. The shortfall could have been “multiples” more than 25 billion pounds under a 10 percent threshold, Edward Firth, a banking analyst at Macquarie Group Ltd. in London said.
Britain’s central bank said that expected loan losses could exceed provisions by 30 billion pounds, while future fines and conduct-related penalties could be 10 billion pounds more than banks expected. It said lenders underestimated assets weighted for risk by 170 billion pounds, leading to a 12 billion-pound capital shortfall in that category.
The full impact of the three areas could deplete lenders’ capital by 52 billion pounds, less than the 60 billion-pound estimate that emerged from the BOE’s November Financial Stability Report. Some banks already have enough resources to cover them, paring the shortfall to 25 billion pounds, the BOE said yesterday. The capital deficit has already been cut about half by measures banks have already agreed to take, according to Andrew Bailey, the U.K.’s chief banking supervisor. The BOE itself didn’t identify or quantify the number of lenders that need to raise capital.
RBS’s shortfall is still about 6 billion pounds and Lloyds about 3 billion pounds, the Financial Times reported, citing unidentified people with knowledge of the discussions.
The central bank’s focus on loan losses could still hit RBS and Lloyds the most because of their commercial real estate holdings, while Barclays Plc (BARC) and RBS, with their investment- banking units, would be most affected by the changes to risk weights, said Simon Maughan, an analyst at Olivetree Securities Ltd. in London.
RBS fell 3.1 percent in London trading yesterday, the most among U.K. banks, while Lloyds was biggest gainer, rising 2.2 percent. HSBC fell 0.1 percent and Barclays gained 0.2 percent.
Barclays, Britain’s second-largest bank by assets, said in a statement yesterday it has a “clear plan” to reach its capital target by 2015. RBS said in a separate statement it has a “strong capital position.” Officials at HSBC Holdings Plc (HSBA), Lloyds and the Bank of England declined to comment.
HSBC and Standard Chartered Plc (STAN), the two British banks that get most of their profit from Asia, have the strongest core Tier 1 capital ratios under the Basel III rules at 9.8 percent and 10.7 percent respectively. Barclays has a ratio of 8.2 percent, Lloyds 8.1 percent and RBS 7.7 percent.
A government-commissioned report led by Oxford academic John Vickers recommended in September 2011 that U.K. banks have a core Tier 1 ratio of at least 10 percent. The Basel III rules, scheduled to be fully implemented globally by 2019, will set the minimum core capital for banks at 4.5 percent of their assets, weighted for risk.
So-called systemically important banks must maintain capital ratios of between 8.5 percent and 10 percent under the Basel rules. HSBC will have to hold 9.5 percent, Barclays 9 percent, RBS 8.5 percent, and Standard Chartered 8 percent.
Since the BOE asked the Financial Services Authority in November to examine capital levels, banks have announced asset sales and plans to issue contingent convertible notes to bolster capital.
“We expect capital issuance to come in the form of contingent capital rather than direct equity,” Greenwood wrote in a report to clients yesterday. “Banks may also need to push through additional asset sales, both of which could be moderately dilutive to earnings.”
Lloyds this month sold a stake in asset manager St. James’s Place Plc, booking a 400 million-pound gain, while RBS said last month it will sell its U.S. operation and shrink its securities unit to bolster capital. Barclays sold about $3 billion of 10- year contingent capital notes in November. It plans to sell additional notes, which convert to equity in the event that capital ratios fall below a set level, a person with knowledge of the matter said yesterday.
The BOE announcement will “have a very limited impact on the banks’ existing capital plans,” said Ian Gordon, an analyst at Investec Plc (INVP) in London. “Importantly, there is no trigger for any fresh equity issuance.”
The Prudential Regulation Authority, which will take over from the FSA next month, will assess banks’ capital adequacy and may impose higher requirements on lenders.
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