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Bank of England Governor Mark Carney has once again shown how sensible he is, using a press conference to accompany bad news to calm investor nerves before the stock markets opened. Last time he did this was June 24th, the morning of Brexit, praised for being the only political-like figure (remember he’s not a politician, the BoE is independent) to stand up and put us at ease that everything would be OK, pledging plentiful monetary policy support to help avoid a referendum-induced economic crash.
Today he has told us that the UK’s weakest bank – RBS – is still just that after a BoE Stress test, almost a decade after the financial crisis began and the UK taxpayer had to bail it out for £45bn. Outstanding legal challenges remain a real problem, especially in the US. However, today’s fail is only under a doomsday scenario (GDP and house prices plunge, unemployment spikes, oil prices tank), the most stringent to date. It is also one which makes the summer’s EBA European equivalent (no pass or fail mark) look like a missed opportunity, especially with Italy’s banking sector sitting so perilously ahead of what could be a make-or break referendum on Sunday.
While RBS was hit most in the summer EBA test and came off worst again this morning, all capital shortfalls identified at RBS, BARC and STAN are being dealt with already. Only RBS requires further monitoring but, more importantly, it doesn’t need to raise more capital, it needs only to keep shedding risky assets. It is also news that things aren’t even worse under such a doomsday scenario that is keeping RBS shares from holding the UK Index wooden spoon. Their 3.7% fall is less than that of CPI whose shares have broken below 8yr support at 550p. While a weak showing is understandable, along with small gains for LLOY and HSBC and small losses for STAN, the overall impact is rather measured, likely thanks to Carney’s early intervention.
However our standout performer this morning has to be BARC posting minimal losses of 0.2% despite a capital shortfall and being more investment banking and internationally exposed. Then again remember this is all based on stress tests started in March, when the world was a very different place. I wonder what things will look like next year when the BoE stresses for a bad Brexit scenario and all the other political risk events we face across Europe.
Mike van Dulken, Head of Research, 30 Nov
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