Royal Bank of Scotland (RBS) has come out worst of the UK-listed banks in a new stress test conducted by the European Banking Authority, in terms of percentage decline in capital ratio.
The test assesses how the banks might perform in adverse economic conditions.
The stress test looks at common equity tier 1 ratio (CET1) which is a measure of a bank’s core equity capital compared with its total risk-weighted assets. It takes a starting point of December 2015.
Investors are worried about the capital ratio outcomes for both Royal Bank of Scotland and Barclays (BARC) as their shares fall by more than 2% in early trading on 1 August.
Barclays joins RBS in having weak results in the stress test but argues that the assessment assumes no improvement to its balance sheet.
In a statement to the stock market, Barclays notes the test does not take into account future business strategies or management actions. The bank is in the middle of a large restructuring programme which will see it withdraw from Africa and focus on the UK and US.
Royal Bank of Scotland sees its CET1 ratio fall from 15.5% in the stress test to 8.1% in 2018. The low point is 7.8% as of 31 December 2017.
Chief financial officer Ewen Stevenson claims RBS has materially strengthened its CET1 ratio, substantially reduced its balance sheet and leverage, and continued to de-risk asset exposures.
Barclays’ CET1 ratio declines from 11.4% to 7.3% in the adverse scenario. HSBC’s (HSBA) CETI ratio falls from 11.9% at the end of 2015 to 8.8% three years later.
Lloyds Banking Group’s (LLOY) CET1 ratio moves from 13% as at December 2015 to 10.1% in December 2018. ‘These results are significantly above the group's minimum capital requirements,’ says Lloyds.
‘This outcome reflects the de-risking undertaken and re-affirms the strong capital and balance sheet position of the group.'
Investors like this news, sending Lloyds' shares up 0.15% to 53.23p.