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(Updates shares, adds details)
By Sinead Cruise
LONDON, Dec 17 (Reuters) - Shares in Lloyds and
Royal Bank of Scotland tumbled on Tuesday after failing
to impress in the 2019 stress test of Britain's biggest banks,
while new capital rules are expected to hit their multi-billion
pound investor payout plans.
The UK's largest domestic banks both passed the Bank of
England's annual assessment of balance sheet strength but plans
to double a 100 basis point capital buffer designed to protect
lenders in a depressed economy could put both banks' 2020 share
buyback plans in jeopardy, analysts said.
"Given we have not seen an acceleration in credit growth, we
conclude this is being put in place to be, for lack of a better
word, a "Brexit buffer"," analysts at Jefferies said.
The BoE said the financial system was sufficiently well
capitalised to endure a "no-deal" Brexit but some economists
suggested Britain's imminent exit from the European Union could
still crimp credit demand and lead to a spike in bad debts.
Lloyds shares were 4.6% down at 1154 GMT while RBS shares
were down 3.8%, erasing some of the gains booked since the
business-friendly Conservative Party recorded its best election
result in decades on Friday.
The increase in the counter-cyclical buffer is seen likely
to lead to a reduction in another pot of regulatory capital
known as P2A by 50%. This will allow major British banks to
absorb up to 23 billion pounds of losses in a downturn without
cutting lending.
For larger banks, the BoE said the changes would increase
Tier 1 capital requirements, the key measure of balance sheet
resilience, by about 0.35 percentage points to just over 14%.
That rise could put in doubt the banks' near-term goals to
hand shareholders billions of pounds via special dividends and a
buyback bonanza, with Lloyds' 1.2 billion buyback target now
considered a "best case", according to KBW analysts.
Shares in Barclays were also down 3% at 1154 GMT.
Like Lloyds, the BoE said Barclays would need to convert
some of its AT1 capital into equity during a stressed scenario,
if new accounting rules that fully take effect in 2023 were
applied.
Shares in HSBC meanwhile were 1% higher at 1154
GMT, even though the bank also needed to cut dividends, bonuses
and AT1 bond coupons to clear the pass rate hurdle in a test
described by the banks as more severe than the global financial
crisis.
"The BoE is actually strengthening the resilience of banks’
capital positions, improving their capital flexibility while
maintaining minimum capital requirements at roughly current
levels," Goodbody said in a note to clients.
(Reporting By Sinead Cruise, editing by Iain Withers and Jane
Merriman)
