If a bank board wanted the basis upon which to slow the return of the excess capital, this stress test “proves apt”, said analysts at UBS
Lloyds Banking Group PLC (LSE:LLOY) had the least headroom of all the FTSE 100 banks in the latest stress testing exercise carried out by the Bank of England, which could impinge on its plans for dividends and acquisitions under new chief executive Charlie Nunn.
What’s more, analysts disagreed over whether the tough 2021 UK bank stress test, the results of which were released late on Monday, was likely to provide a good reason for the bank’s board to slow capital payouts next year.
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The latest bank stress test was different from all earlier editions, said UBS analysts Jason Napier and Sanjena Dadawala, in that it “doesn’t inform future bank-specific capital requirements and is focussed on determining whether lenders (and the system) could cope with an enormous double dip stress on top of the pressure of the 2020 COVID downturn”.
The scenario posed in the stress test was a theoretical one in which UK unemployment rose to 12% (from 4.2% currently), GDP plunged 9% (which is not that unrealistic with world GDP currently down 10%) and house prices and commercial real estate lost 30-40% of value.
Under this intense stress scenario, it was analysed if banks could still cope with no government support, which would require the sector to post another 2.5 times of £70bn in impairments on top of the £20bn already booked in 2020.
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All banks passed this theoretical scenario, which should mean that, with the UK banking sector holding around 15% of its total market cap in capital above the regulatory minimum of common equity tier-one (CET1), this should mean that there’s a massive pile of cash ready to splurge on dividends.
However, the UBS team suggested (not mentioning any bank in particular) that if a board wanted the basis upon which to slow the return of the excess capital, the severity of this test “proves apt – and emergence of the omicron variant should do the job”.
But analyst Gary Greenwood at Shore Capital said what is important is that Lloyds passed the stress test and that no capital actions are therefore required by the BoE.
What’s more, Lloyds reported CET1 ratio strengthened further during 2021 from 16.2% at the end of December, the balance sheet date on which the stress test was based, to 17.2% at the end of September.
With Lloyds’ management targeting ratio of 13.5% and the current minimum regulatory requirement being 11.0%, “even if the regulator did decide to increase the requirement slightly this would be unlikely to impact the target level”, Greenwood said.
“As it is the target level that the board will consider when deciding on shareholder distributions, our view that the group will announce a share buyback…
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