Lloyds and RBS trading lower following 2019’s stress testing

The Bank of England (BoE) puts the largest banks in the UK under stress testing towards the end of the year. Failing to post impressive results in 2019’s testing, the Royal Bank of Scotland (RBS) and the Lloyds Banking Group were seen losing strength in the stock market on Tuesday morning.  

The
Bank Of England To Double The Capital Buffer

The
largest Britain banks have their balance sheet strength assessed by the Bank of
England on an annual basis. While the RBS and Lloyds
bank managed to pass the evaluation, the recent declaration from the BoE
that the capital buffer (currently at a 100-basis point) will be doubled in the
upcoming years, is expected to weigh on the share prices of both banks, as per
the analysts.

The
Bank of England’s move regarding capital buffer is directed at the lenders to
protect them from the complications of poor economic conditions. Joseph Dickerson
of Jefferies commented on the recent news:

“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 at 2% buffer is more appropriate in a “standardized
risk environment.”

On
Tuesday morning, during the early session, RBS stock was seen trading 3.8%
lower while Lloyds had dropped by 4.8% in the stock market. The two banks had
posted remarkable gains following the Conservative Party’s victory in the UK’s
general election on December 12^th. As of Tuesday, following the BoE
announcement, must of these gains have faded away. Conservatives are known for
their business-friendly government.

Barclays
Also Dropped By 3% On Tuesday

Share
prices for Barclays were also seen trading 3% lower on Tuesday. As per the Bank
of England, in light of the existing stress scenario, the bank will have to consider
taking its AT1 capital and converting a part of it into equity, in an event
that the new set of accounting regulations were applied as per the schedule in
2023.  

The
announced increase in the capital buffer, according to the analysts, will
enable the lenders to absorb as much as £23 billion in losses without having to
restrict the lending.

The
Lloyds Banking Group has remained fairly upbeat in 2019 with around 15% gain
for the year. The stock has recently printed a year-to-date high of 67.25 GBX
on Monday. RBS,
on the other hand, has remained slightly upbeat in 2019. The stock started
the year at $5.51 and is currently trading at $6.96. $7.24 marks the
year-to-date high for RBS.