The Bank of England on Wednesday said the major UK banks were ‘resilient to a severe stress scenario’, in its latest cyclical stress test results, with all eight surveyed lenders passing.
The UK central bank said the test was of a macroeconomic scenario of rising global interest rates, ‘deep simultaneous recessions with materially higher unemployment in the UK and global economies’, and sharp falls in asset prices.
The BoE summarised: ‘The results of the stress test support the [Financial Policy Committee]’s judgement that the UK banking system has the capacity to support households and businesses through a period of higher interest rates, even if economic conditions are substantially worse than expected.’
Having last been conducted in 2019, the BoE said banks started the stress test with improve asset quality, following increases in house prices, tightening lending standards and changes in the composition of banks’ balance sheets since then.
‘This dampens the negative effect of the macroeconomic shocks included in this scenario,’ the BoE said.
Lloyds Banking Group PLC said it ‘comfortably passed’ the stress test and as a result, is not required to take any capital actions.
This was because the BoE calculated its transitional common equity tier 1 ratio to be a low point of 11.6% and leverage ratio low point to be 4.5%, after the application of management actions. This was significantly above the BoE hurdle rates of 6.6% and 3.5% respectively.
Lloyds said the results reflected its ‘prudent’ balance sheet management and ‘strong’ capital position.
HSBC Holdings PLC reported a CET1 capital ratio of a low point of 10.7%, clearing its BoE hurdle rate of 6.2%. HSBC said the results demonstrated its continued capital strength ‘under this severe downside scenario’ across the wider group and HSBC UK, its local ring-fenced bank.
Standard Chartered PLC said it exceeded all hurdle rates, as it has a ‘diverse and liquid balance sheet’ and demonstrating its ‘continued capital strength and resilience to stress’. The BoE reported StanChart’s CET1 ratio to be a low point of 8.8%, clearing a 7.1% hurdle rate.
NatWest Group PLC’s CET1 capital ratio of a low point of 11.1% also cleared its 7.0% hurdle rate. Chief Financial Officer Katie Murray said the results ‘once again highlighted NatWest group’s all weather balance sheet enabling us to support our customers and the economy, delivering sustainable value creation and strong distributions for shareholders’.
Barclays PLC cleared its 6.8% hurdle rate with a low point CET1 capital ratio of 8.5%.
Virgin Money UK PLC said it performed ‘resiliently’ in the stress test and that no additional capital actions were required. Its CET1 capital ratio at its low point was 10.8%, nearly double its 5.9% hurdle rate. Virgin Money UK said it anticipates resuming its share buyback programme as previously guided, reinforced by the stress test results but still subject to board and regulatory approvals.
Santander UK Group Holdings PLC, part of Banco Santander SA, said it did not need to undertake any actions, after clearing its 8.1% hurdle rate with a low point CET1 capital ratio of 11.3%.
Meanwhile, mortgage lender Nationwide Building Society said the BoE stress test confirmed that it would ‘remain profitable’ amid current macroeconomic conditions and continue to make full distributions on all tier 1 capital instruments. It significantly cleared its hurdle rate of 7.4% with a low point CET1 capital ratio of 20.4%. As a result, it also does not need to take any further actions.
The BoE noted higher net interest income for the banks, as policy rates rose in line with higher inflation. However, it said: ‘This benefit is constrained by banks being required to assume an increasing share of deposits are interest bearing, and that the interest paid increases by more than recent experience.’
The Financial Policy Committee said it was important for investors to be aware that banks would take necessary actions if wider stresses harmed their resilience. The BoE explained that this resilience was maintained in part on the banks’ ability in a stress situation to cut dividend payments, variable employee wages, and coupon payments on additional Tier 1 instruments.
In late June, the US Federal Reserve announced that all major US banks had passed its annual stress test, which is designed to assess how well they would fare in a major financial crisis.
The Fed found all 23 banks tested ‘are well positioned to weather a severe recession and continue to lend to households and businesses even during a severe recession,’ according to a report it published.
The latest test results follow widespread banking turbulence in the US and Europe earlier this year, sparked by the rapid collapse of Californian regional lender Silicon Valley Bank. SVB experienced a bank run by depositors concerned by the impact of rapidly rising interest rates.
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