For UK banks, events over the past few months have combined to form what would be a perfect storm of bad news. Stagnant economic growth, plummeting pound and a hypothetical portfolio of around £30bn of bad consumer loans make for dire reading for the nation’s lenders.
The BoE’s stress test on Tuesday 28th November could play a significant role in the industry’s ability to pay dividends to shareholders and force the banks into asset selloffs if they fail the tests.
Stress test results are due to be published for Royal Bank of Scotland, HSBC, Barclays, Standard Chartered, Lloyds, Nationwide and the UK business of Spanish Santander.
70% tax-payer owned Royal Bank of Scotland will come under closer scrutiny, particularly given it failed the BoE stress test last year. Chancellor of the Exchequer Philip Hammond is prepping RBS for privatization with a figure of £15bn touted as the asking price, a £26bn loss on the deal. That will take some seriously rose-colored spectacles for tax-payers to handle and is sure to pile even more pressure on PM May’s tenuous hold on the reins in Westminster.
The hypothetical scenarios the BoE will apply in the stress tests include:
- 33% fall in house prices
- 27% fall in the GBP
- 4.7% fall in the UK’s GDP
- Interest rate hike to 4%
While the BoE has already hinted at losses over the next 3-years of up to £30bn under the stress test scenarios, how that will distribute among the banks as well as which banks will be forced to hold extra capital will become clear on Tuesday.
The banking sector in the UK is already facing what may become mass exodus of financial institutions post-Brexit, and RBS is already dealing with a multi-million-pound settlement with the US DoJ (Department of Justice) over the banks handling of mortgage bond sales. Similar settlements with Deutsche Bank and Credit Suisse last year totaled $12.5bn, a precedent which makes for sleepless nights for RBS shareholders.
The Old Lady of Threadneedle Street looks set for bad news from the stress tests, and bank shareholders may well be in for a very unpleasant surprise. The usual recipient of bank fails, the UK taxpayer may not be ready to take this one on the chin, and certainly, PM May lacks the parliamentary fire-power to brush these off.
All in all, it looks like Santa Clause might not have much in the way of good cheer for UK banks.
This article is for educational and informative purposes only and should not be considered as investment or trading advice.