Two of Britains biggest banks in Lloyds (LON:LLOY) and Royal Bank of Scotland Group plc (LON:RBS) have seen their shares dip after failing the UK’s most rigorous banking test.
Both the British banks had seen their shares in green since Friday, as the firms continued to ride a wave of optimism following PM Johnsons election win dubbed the ‘Boris Bounce’ by analysts.
However, today the picture is slightly more worrying for both of the British banks.
Both banks passed the Bank of Englands annual assessment in the balance sheet department.
However, plans to double a 100 basis point capital buffer designed to protect lenders in depressed economic conditions could put both bank’s 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” as the Bank of England has now determined that a 2% buffer is more appropriate in a “standardised risk environment,” Jefferies analyst Joseph Dickerson said.
The increase in the countercyclical buffer is seen likely to lead to a reduction in core tier 1 capital requirements by a similar amount, allowing major British lenders to absorb up to 23 billion pounds of losses in a downturn without restricting lending, as Reuters reported.
But near-term goals to deliver more than a billion pounds of shareholder rewards via a buyback bonanza must now be considered “best case”, according to analysts at KBW.
Lloyd’s have already been put into bad media spotlight earlier this year. The firm faced public scrutiny when they received criticism over the treatment of victims within the HBOS fraud scandal.
Certainly, this will do no favor to either firm especially at a time where the global banking industry and firms such as Lloyds and HSBC (LON: HSBA) have seen their profits take a bruising.
Certainly, being a big player in the banking industry does often lead to a lot of media coverage both good and bad, but not passing the Bank of England stress test may alert both senior management and shareholders.
Shares in Barclays dipped 4.29% to 249p. 17/12/19 10:49BST.
Shares in Lloyds fell further by 5.49% to 63p. 17/12/19 10:50BST.