UK banking system passes stress test challenge, but RBS slapped on the wrist

<p>Before the focus turns to the Opec meeting later today, the market is looking at the latest Bank of England Financial Stability report. In essence […]</p>

Before the focus turns to the Opec meeting later today, the market is looking at the latest Bank of England Financial Stability report. In essence the report does not deliver doom and gloom, instead it highlights a few areas in need of work, but RBS, once again, looks like the weakest link in the UK banking sector.

Key takeaways:

The key takeaway from the report is that the outlook for financial stability is challenging, Brexit and high levels of household debt have been cited as the key reasons for this. Even though all of the main banks were expected to pass the more stringent stress tests it is really no surprise that RBS has failed to pass all of the stress test hurdles, and as a result it has updated its capital-raising plan. RBS’s share price had started to decline in recent days, so it will be interesting to see if this news is already baked into the price, and further declines may be limited.

RBS in the firing line:

RBS was the only bank required by the BOE to submit a new capital-raising plan. Its initial outline includes reducing costs (probably more job losses), reducing risk-weighted assets across the bank, and further asset disposals. RBS wasn’t the only bank that came in for criticism from the report; Barclays and Standard Chartered were also mentioned. Barclays was cited for its systemic risks, and Standard Chartered missed its tier one capital requirement, but both banks do not need to submit revised capital plans to the BOE. This is good news for Standard Chartered, as there had been some concern for the bank ahead of the publishing of this report due to its exposure to emerging markets and commodities.

BOE looks on the bright side

On the positive side, the BOE said that the UK is well able to finance its huge current account deficit, and the banking system, although not perfect, is in a position to support the UK economy, even in a severely stressed scenario.

Here are our key takeaways and potential market reaction:

  • RBS is still the weakest link in the UK banking system
  • The results aren’t as bad as they could have been, and the UK banking system looks in good shape, especially compared to its European counterparts (here’s looking at you, Deutsche Bank).
  • GBP/USD ticked modestly lower when the report was released, although we do not think that this report will have a long-term impact on the pound, any drop below 1.24 could see further losses.
  • Futures point to a flat to neutral open for the FTSE 100 on Wednesday, we expect the FTSE 100 to be more sensitive in the short term to whatever comes out of the Opec meeting, rather than to this report.
  • RBS shares are likely to come under pressure, while we could see some upside for Standard Chartered.
  • We would expect the UK banking sector to generally do well on Wednesday, now that this stress test is out of the way and there have been no major casualties.
  • We continue to think that the UK banking sector will outperform Europe’s banking sector, which, in the longer term (once Opec is out of the way) could boost the FTSE against its European counterparts today including the Dax and the Eurostoxx.

 

Join our live webinars for the latest analysis and trading ideas. Register now

GAIN Capital UK Limited (trading as “City Index”) is an execution-only service provider. This material, whether or not it states any opinions, is for general information purposes only and it does not take into account your personal circumstances or objectives. This material has been prepared using the thoughts and opinions of the author and these may change. However, City Index does not plan to provide further updates to any material once published and it is not under any obligation to keep this material up to date. This material is short term in nature and may only relate to facts and circumstances existing at a specific time or day. Nothing in this material is (or should be considered to be) financial, investment, legal, tax or other advice and no reliance should be placed on it.

No opinion given in this material constitutes a recommendation by City Index or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person. The material has not been prepared in accordance with legal requirements designed to promote the independence of investment research. Although City Index is not specifically prevented from dealing before providing this material, City Index does not seek to take advantage of the material prior to its dissemination. This material is not intended for distribution to, or use by, any person in any country or jurisdiction where such distribution or use would be contrary to local law or regulation.

For further details see our full non-independent research disclaimer and quarterly summary.