U.K. Banks Poised to Plug Capital Gap Without Shareholder

Britain’s five biggest banks are poised to plug their part of a 25 billion-pound ($38 billion) capital shortfall identified by regulators without turning to shareholders for money.

Royal Bank of Scotland Group Plc and Lloyds Banking Group Plc plan to achieve capital levels required by the U.K. regulator by shrinking their balance sheets and selling assets, the firms said in separate statements yesterday. Barclays Plc and HSBC Holdings Plc have also ruled out share sales, according to two people familiar with their plans who asked not to be identified because they weren’t permitted to talk publicly. Standard Chartered Plc said it already meets requirements.

U.K. banks have been seeking ways to strengthen their balance sheets since the Bank of England said in November it was concerned that they weren’t holding enough capital. The Prudential Regulation Authority, a unit of the central bank, ordered banks in March to plug the shortfall by the end of the year to cover bigger potential losses, possible fines for mis-selling and stricter risk models.

“This is confirmation from the Bank of England that the capital debate is over and we can move on,” said Chirantan Barua, a banking analyst at Bernstein Research in London. “British banks are generating lots of capital this year and next. The funding problem in the U.K. is over.”

Shares Drop

Barclays, the U.K.’s second-biggest bank, fell 3.6 percent to 321.75 pence at 8:55 a.m. in London. Lloyds slipped 3.2 percent to 60.95 pence, while RBS decreased 4.3 percent to 334.50 pence. HSBC, Europe’s largest bank, dropped 3.1 percent to 744 pence, while Standard Chartered fell 3 percent.

Lloyds, the second-largest British government-owned lender after RBS, said in a statement from London today that it sold another stake in wealth manager St. James’s Place Plc for about 450 million pounds, the second such move since March, when it raised gross proceeds of 520 million pounds.

Barclays sold about $4 billion of contingent capital notes, or Cocos, in November and April and RBS said earlier this year it would sell a 25 percent stake in Citizens Financial Group Inc., a U.S. consumer and commercial lender. RBS’s U.S. unit, which is mostly comprised of Citizens, had revenue of about 3.1 billion pounds in 2012, accounting for about 12 percent of the British bank’s total.

CoCos ‘Option’

RBS, Lloyds and Barclays have all gained approval from shareholders this year to be able to sell so-called CoCos. While RBS’s plan “does not call for issuance” of CoCos, it “remains an option,” according to the statement. Lloyds said it expects to meet capital requirements without their use.

The securities convert into equity in the event that a bank’s capital falls below a pre-set level and are designed to protect taxpayers in a financial crisis.

In a sign of increasing financial health, HSBC said earlier this month it plans to increase dividend payments to shareholders and will ask the PRA for approval to buy back shares as early as 2014. Barclays has also said it plans to raise payments to shareholders.

“HSBC couldn’t have given their strategy update last week without knowing where the PRA stood on its capital plan,” said Michael Trippitt, an analyst at Numis Securities Ltd. in London, who has a hold rating on the bank. “To talk of seeking approval of buybacks, I would safely assume the PRA gave that a tick, ditto Barclays ahead of their strategy day” in February.

Capital Buffers

Spokesmen at Barclays and HSBC declined to comment. Sarah Bailey, a spokeswoman for the PRA, declined to give details. Standard Chartered said in an e-mail that the PRA “confirmed our understanding” that it already meets capital requirements.

HSBC and Standard Chartered, the two British banks that generate most of their profit from Asia, have the strongest core Tier 1 capital ratios under the Basel III rules at 10.1 percent and 10.7 percent, respectively. Barclays has a ratio of 8.2 percent, Lloyds 8.1 percent and RBS 8.2 percent.

A government-commissioned report led by John Vickers, the former chairman of Britain’s Independent Commission on Banking, recommended in September 2011 that U.K. banks have a core Tier 1 ratio, a measure of financial strength, 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.

‘Appropriate Steps’

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.

Lloyds yesterday reiterated that it expects its fully-loaded core Tier 1 capital ratio to exceed 9 percent by the end of the year and 10 percent by the end of 2014. RBS will have met the Basel requirements by the end of this year and the Vickers requirement by the end of 2014, Chief Executive Officer Stephen Hester said earlier this month.

The PRA said in a statement that Lloyds and RBS have “advanced their plans to a position where disclosure is appropriate.” The regulator is still in talks with other lenders and “more information will be provided along with confirmation that, where necessary, banks will take appropriate steps to ensure they meet” capital recommendations, it said.

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