Shareholders of the two of the UK's largest banks to have been bailed-out by the tax-payer following the financial crisis have today received good news. Lloyds Banking (LLOY) and Royal Bank of Scotland (RBS) are set to meet the Bank of England’s new capital requirements without having to raise additional funding.
These were the findings a review by the Prudential Regulation Authority (PRA), a financial regulator, to judge if UK banks could withstand further losses on their loans. The news was well received sending Lloyds up 2.5% to 63p and RBS by 1% to 345.7p.
Management at Lloyds reaffirmed its expectations that the bank’s tier 1 ratio – its core equity capital compared to its risk-weighted assets – will be 9% by the end of the year and above the 10% level 12 months later. RBS’ board expect to see an improvement in its 10.8% ratio.
The PRA review was initiated by the Bank of England in March after it said the industry would have to raise £25 billion by the end of the year to adsorb the impact of further losses. The all-clear given to two of the UK most high-profile lenders could lead to questions over the Bank of England’s ability to sufficiently judge the industry’s problems after its appraisal that a huge inflow of fresh capital was needed.
Lloyds received a £20 billion bail-out from the tax payer in 2008 following its takeover of Bank of Scotland and the financial regulator’s findings provide a further boost after the bank traded above the government’s 61.2p break-even threshold last week for a profitable disposal of its holdings.
Although this will be seen by some another step closer to privatisation, issues persist over the quality and sustainability of these banks’ revenues. Lloyds made a £2 billion pre-tax profit in the opening three months of the year, up from £280 million during the same period in 2012. Meanwhile, RBS made a £826 million pre-tax profit in the first quarter, compared to a £1.5 billion loss during the same period of 2012.
These increases were driven by falling bad debts and selling non-core assets. Management at both lenders will have to find new sources of income before they run out of things to sell. So it appears that these banks are being run to drive the share price up so the government can get its money back rather than creating long-term and sustainable growth.