U.K. Banks Sell Assets to Plug Capital Hole Before Report

U.K. lenders including Royal Bank of Scotland Group Plc and Lloyds Banking Group Plc are selling assets and detailing plans to bolster their balance sheets to deflect calls from regulators to plug a capital shortfall.

Lloyds this week sold a stake in asset manager St. James’s Place Plc, booking a 400 million-pound ($597 million) gain, while RBS said last month it will sell its U.S. operation and shrink its securities unit to bolster capital. Barclays Plc plans to sell contingent convertible notes to boost its financial strength, a person with knowledge of the matter said last month.

The Bank of England’s Financial Policy Committee, which oversees the stability of the lending system, said in November banks may have a capital shortfall of as much as 60 billion pounds because they haven’t recognized future losses on bad loans or made adequate provision for compensating customers wrongly sold products such as payment-protection insurance. The committee will meet on March 19 before publishing a statement on March 27.

“There seems to be a lot of smoke around this which suggests there’s a fire,” said Christopher Wheeler, a London-based financials analyst at Mediobanca SpA. “Banks are doing everything they can to get a solid capital position.”

HSBC Holdings Plc and Standard Chartered Plc, the two British banks that get most of their profit from Asia, have the strongest core Tier 1 capital ratios under the Basel Committee on Banking Supervision’s latest rules on capital, known as Basel III. HSBC’s ratio, at 9.8 percent, exceeds the 9.5 percent minimum the bank will have to hold. Standard Chartered’s ratio stands at 10.7 percent, meeting its 8 percent threshold.

RBS Lags

Meanwhile, RBS, Britain’s biggest government-owned bank, had a core Tier 1 ratio of 7.7 percent at the end of December, the worst among the U.K. banks and less than the 8.5 percent minimum required under Basel III. Lloyds, the country’s largest mortgage lender, has a ratio of 8.1 percent, more than the 7 percent it will have to hold. Barclays has a ratio of 8.2 percent, less than the 9 percent minimum.

“The rankings have been clear: Barclays, Lloyds and RBS have tended to be at the weaker end of Basel III,” said Sandy Chen, an analyst at Cenkos Securities Plc in London. “HSBC and Standard Chartered have been at the stronger end.”

Officials at Standard Chartered, RBS, Lloyds, HSBC, Barclays and the FSA declined to comment.

The central bank said in November it was concerned lenders haven’t fully recognized future loan losses and may be using inappropriate risk models to assess how much capital they hold. Under the Basel rules, firms use so-called risk-weightings to decide how much capital to hold based on an assessment of how likely assets are to default and the riskiness of counterparties.

Growth Threat

At the same time, banks are under pressure from both government and regulators not to bolster capital by cutting back lending and choking economic growth.

Following pressure from the government and the FSA, RBS last month shifted strategy and said it would sell a 25 percent stake in Citizens Financial Group Inc., the U.S. consumer and commercial lender acquired in 1988, in two years. Chief Executive Officer Stephen Hester had said in August the bank, which is 81 percent government owned, would retain Citizens because it was a “core” part of the company.

“We did reach an important accommodation in recent days with the government, our majority shareholder, and the regulators in relation to their well-publicized concerns across the industry on capital,” Hester said on Feb. 28. “The two revisions to our strategy that go with that are a further shrinkage of our markets business, with the capital there coming down significantly further over the next couple of years” and the intention to start selling Citizens, Hester added. The lender plans to bolster its capital ratio to 9 percent this year.

Government Injection

Andrew Bailey, the U.K.’s chief banking supervisor, told lawmakers in London yesterday that he hasn’t asked the government to inject additional money into RBS. He will lead the Prudential Regulation Authority when it starts operations next month.

RBS said yesterday’s sale of a 507 million-pound stake in Direct Line Insurance Group Plc, the U.K.’s biggest home and motor insurer, was prompted by European Union state-aid rules, rather than capital needs. EU regulators ordered the bank to sell the insurer after RBS received a 45.5 billion-pound government rescue in 2008 and 2009, the biggest bank bailout in the world. The Direct Line shares were sold for less than their book value.

RBS has tumbled 7.5 percent this year, making it the worst-performing stock in the six-member FTSE 350 Banks Index. Lloyds has gained 7.2 percent, Standard Chartered 9.4 percent, HSBC 12 percent and Barclays almost 20 percent.

Lloyds Sale

Lloyds said the sale of the 20 percent stake in St. James’s Place will increase its core Tier 1 ratio by 15 basis points, or 500 million pounds. Selling its remaining 37 percent stake in the asset manager at about the same price could add an extra 30 basis points to the capital gage, Citigroup analysts including Andrew Coombs wrote in a note to clients on March 11.

“The well-timed partial disposal of Lloyds’ stake in St. James’s Place” is “likely to be seen as politically astute ahead of next week’s FPC meeting,” said Ian Gordon, a banking analyst at Investec Plc in London. “Lloyds may be successful in heading off the unpalatable potential for a fresh regulatory assault and/or any further equity issue.”

Lloyds CEO Antonio Horta-Osorio said earlier this month the bank had boosted its core Tier 1 ratio by 1 percentage point in 2012 and remained “confident” in the firm’s capital position as the it shrinks its balance sheet.

Barclays Co-Cos

Barclays, Britain’s second-largest bank by assets, is planning on selling contingent convertible notes to bolster its balance sheet, a person with knowledge of the matter said last month. The bank may sell as much as 7 billion pounds of the securities, which become shares if its core Tier 1 equity ratio drops below a set level. In November, the firm issued $3 billion of contingent capital notes.

Barclays is targeting a core Tier 1 ratio of 10.5 percent, 1.5 percentage points more than the minimum required by Basel III, Benoit de Vitry, Barclays’s group treasurer, told analysts on a Feb. 13 conference call.

“The heavy lifting has been done and set in motion,” said Chirantan Barua, an analyst at Bernstein Research in London.

That’s allowing Barclays and HSBC to return capital to shareholders. Barclays raised its fourth-quarter dividend to 3.5 pence a share from 3 pence in the year-earlier period. HSBC said it would increase its fourth-quarter dividend to 18 cents from 14 cents. Both government-owned Lloyds and RBS have not paid dividends since the crisis.

“We are already really well placed,” HSBC CEO Stuart Gulliver told analysts on March 4. After selling or closing more than 47 operations since he took the top job in 2011, he said he may exit more businesses this year to raise the lender’s capital ratio by 50 basis points to 10.3 percent.

HSBC may be in the strongest position among the banks with British operations, Bernstein’s Barua said. RBS and Lloyds “are restructuring and not generating great amounts of cash,” Barua said. “In a couple of years, HSBC will not know what do with the tons of cash it’s generating.”

Before it's here, it's on the Bloomberg Terminal.