Five U.K. banks must find 13.4 billion pounds ($21 billion) to plug a 27.1 billion-pound capital shortfall by the end of the year, the Bank of England said.
The five lenders, including Barclays Plc (BARC), Lloyds Banking Group Plc (LLOY) and Royal Bank of Scotland Group Plc (RBS), have already submitted plans to raise half the total, the London-based BOE said in a statement today. Lloyds must plan to raise an extra 7 billion pounds, while RBS and Barclays need 3.2 billion pounds and 1.7 billion pounds of additional capital.
“The challenge for the banks is that they have got many projects going on in the capital space,” Kevin Burrowes, a partner at PricewaterhouseCoopers, said in an e-mailed statement. “Many of those projects compete and some are duplicative. Banks need to align their projects and look at their business as a whole rather than in parts to get to the right capital position.”
The strength of Britain’s banking system is under scrutiny as the government considers selling its stake in Lloyds, which is 39 percent-owned by the state, and splitting up RBS. Chancellor of the Exchequer George Osborne said in a speech in London yesterday that the U.K. government would proceed only “if we get value for the taxpayer.”
The central bank, whose Prudential Regulation Authority unit took over as the U.K.’s banking supervisor from the Financial Services Authority this year, outlined potential losses for banks of 52 billion pounds in March. Lenders must “hold capital resources equivalent to at least 7 percent of their risk weighted assets,” with those losses taken into account, the BOE said.
The banks said they won’t need to sell shares to meet the capital standards.
Barclays said it was “confident it will exceed” the requirements by the 2013 deadline. Lloyds and RBS said earlier this year they could meet the requirements without needing to raise additional equity or sell contingent convertible securities, known as CoCos, which convert to equity automatically should capital levels deteriorate to a predetermined level.
“Overall, the U.K. banks look set to broadly achieve the PRA’s capital requirements without the need to issue new equity,” Gary Greenwood, a banking analyst at Shore Capital in Liverpool, England, wrote in a note to clients today.
RBS, which is 81 percent state-owned, is weighed down by too many poor assets to go private immediately, Osborne said. The Edinburgh-based lender received a 45.5 billion-pound bailout, the costliest in banking history, during the global financial crisis. RBS shares remain below the level at which taxpayers break even.
Standard Chartered Plc (STAN), HSBC Holdings Plc (HSBA) and Banco Santander SA (SAN)’s U.K. unit already comply with the recommendation, the BOE said, while Nationwide Building Society must boost capital by 400 million pounds.
Lloyds, Britain’s biggest mortgage lender, fell 0.4 percent at 61.50 pence at 10:18 a.m. in London trading. Barclays fell 2.7 percent to 293.4 pence, while RBS dropped 1.2 percent to 315.7 pence. HSBC fell 2 percent to 675 pence.
In total, Barclays, the U.K.’s second-largest bank by assets, must raise an additional 3 billion pounds in fresh capital, the U.K. central bank said. Lloyds must boost capital by a total of 8.6 billion pounds and RBS 13.6 billion pounds.
A Morgan Stanley report in March estimated that Lloyds needed 7 billion pounds, RBS needed 9.8 billion pounds and that Barclays has a capital shortfall of 9.1 billion pounds under the central bank’s measures.
The PRA also said that Barclays and Nationwide must submit plans to boost their leverage ratios, a measure of their proportion of debt to equity funding, by the end of June. The lenders should plan to reach a target of 3 percent. Barclays has a ratio of 2.5 percent and Nationwide 2 percent, as assessed by the central bank.
The BOE said in March that possible loan losses could exceed provisions by 30 billion pounds, while future fines and conduct-related penalties could be 10 billion pounds more than banks expect. It said lenders underestimated assets weighted for risk by 170 billion pounds, leading to a 12 billion-pound capital shortfall in that category.
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