Exane questions speed bank dividend normalisation after BoE stress tests

Threadneedle Street's stress tests are "somewhat negative" for the UK listed domestic banks, said Exane BNP Paribas on Tuesday, warning that it "raises questions over the speed to dividend normalisation".

Exane noted that the £50bn of losses revealed in the Bank of England's stress tests were much larger than seen in the 2016 stress test and "are likely to raise concerns over the extent to which PRA buffers are required".

The Bank said no banks needed to make changes as a result of the test, the first time it has been able to do this since the tests started in 2014, but its Financial Policy Committee will now review whether an additional capital cushion is needed. Such an extra buffer would be determined by the Prudential Regulation Authority.

Exane added that by the time fully loaded requirements become binding at the start of 2019 these numbers might have changed markedly, with misconduct costs expected to fall markedly over the next year or two, "but the size of these losses will still raise question marks over these banks".

Exane said its initial view is that Barclays "looks most vulnerable of the UK domestic banks to a PRA buffer" at the start of 2019, particularly given it also lost 450bps in last year’s test and the PRA does not focus on just one year’s numbers.

RBS had the worst ratio of maximum stress test losses to each bank's ET1 ratio, at 640 basis points; it was followed by Standard Chartered at 600bps; Lloyds' ratio was 570bps or around 490bps if excluding MBNA; the ratio for Barclays was 500bps and HSBC 470bps.

Lloyds was felt to be "borderline", albeit it did markedly better in 2016 when it only lost 250bps, so Exane said this "might reduce the prospect of a buffer".

RBS looked to have come out the worst, but analysts noted that litigation and misconduct is likely to represent a significant portion of the 640bps loss and the 960bps loss last year, meaning its underlying performance in terms of impairment losses was "relatively good".

While the HSBC loss was quite large, it has done very well in each of the previous three stress tests so analysts "aren’t overly concerned".

While StanChart continues to perform poorly in the test "this should improve as misconduct and legacy portfolios are dealt with". However, the BOE test was particularly stringent on Asian exposures and a reasonably part of the test loss related to risk-weighted asset inflation, so Exane continue to assume a PRA buffer for StanChart.

"Overall therefore, we think this is a slight negative for the sector and once again raises questions over the speed to dividend normalisation," the analysts said.