12th Jul 2023 10:31
(Alliance News) - The latest stress test from the Bank of England has shown major UK lenders would be able to weather an increasingly stress-hit macroeconomic scenario, according to analysts and the UK central bank.
On Wednesday, the BoE 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."
Hargreaves Lansdown's Sophie Lund-Yates said the BoE results showed the UK's main lenders "will be able to stomach" worsening economic conditions, such as the effects of weakening commercial real estate prices, recessions, higher rates and inflation.
Lloyds Banking Group PLC said it "comfortably passed" the stress test and as a result, is not required to take any capital actions. The BoE calculated its transitional common equity tier 1 ratio to be a low point of 11.6%, significantly above the BoE hurdle rate of 6.6%.
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, with the BoE reporting 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, while Barclays PLC cleared its 6.8% hurdle rate with a low point CET1 capital ratio of 8.5%.
Meanwhile, mortgage lender Nationwide Building Society significantly cleared its hurdle rate of 7.4% with a low point CET1 capital ratio of 20.4%.
"The tests come as a relief during a time that's been marred by anxiety about regional banking failures in the US as interest rates have shot up in many major economies," said HL's Lund-Yates.
"A combination of strong balance sheets, healthy asset-classes and a stricter regulatory environment mean the UK's financial giants also have more room to help customers if things get tougher, including changing the terms of loans if needed."
Lund-Yates continued: "Overall, there aren't too many people falling behind on their mortgage payments, but it's widely acknowledged that the full extent of higher rates is yet to trickle down – and the point at which this happens is likely to have consequences for the wider economy and companies.
"For now, the number of households with high debt-service ratios – including accounting for the higher cost of living – is expected to grow in the second half of the year, and companies exposed to customers spending their discretionary income will be watching this closely."
The BoE highlighted the proportion of such households with reducing spending power is expected to remain "well below the peaks seen in 2007", according to Lund-Yates.
Lund-Yates also noted that the BoE pointed to smaller lenders being able to withstand a higher-rate environment.
Virgin Money UK PLC said 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, cleared its 8.1% hurdle rate with a low point CET1 capital ratio of 11.3%.
AJ Bell's Russ Mould noted how "a clean bill of health" for the UK banking sector boosted the FTSE 100 on Wednesday morning. It rose 1.0% to 7,354,57 points.
Shares in London-listed financials were up, with Lloyds up 2.8%, HSBC up 1.3%, StanChart up 1,8%, NatWest up 1.7% and Barclays up 1.5%.
Virgin Money UK was also up 6.4%, while Santander UK did not trade in London by Wednesday morning. The wider Santander group was up 2.0% in London and up 1.1% in Madrid, its primary listing.
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.
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 test results followed 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.
By Greg Rosenvinge, Alliance News reporter
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