Shares in Ulster Bank owner Royal Bank of Scotland (RBS) fell by nearly 5% yesterday after the group said it will need to cut costs and sell assets to bolster its balance sheet by around £2bn after failing UK bank stress tests.
The failed test results could have wider implications for the Irish Government’s plans to sell down its stake in AIB.
RBS was the biggest failure in the latest UK stress tests; effectively meaning it is the worst prepared of the UK lenders to cope with another financial crisis.
RBS, which is still 73% owned by the UK government, missed key hurdles to show that it could cope with future house price collapses or another global recession.
The unexpected result underlines the problems with which RBS is grappling, including a mounting legal bill for misconduct before the 2008 financial crisis and difficulties selling off assets such as its Williams & Glyn banking business.
The Bank of England approved RBS’s new capital plan on Tuesday night.
“Its challenge is that it still has legacy issues ... There’s misconduct costs, there’s impaired assets, they’re still working through the so-called non-core assets, on which they have made progress,” BoE governor Mark Carney said yesterday.
“They are not talking about raising capital. The magnitude of their plan is much bigger than the size of the shortfall in the stress test.”
RBS, which is expected to settle soon with US authorities over alleged mis-selling of mortgage backed securities in the run-up to the financial crisis, said the measures approved by the BoE should mean that it does not have to tap markets to cover the capital shortfall.
The bank is unlikely to have to sell any major assets and will instead raise the additional capital by reducing exposures in sectors including commercial property, oil and gas.
Asset sales would avoid the embarrassment of a rights issue, that would force the UK government to put in even more taxpayer money, given that it owns the majority of the shares.
RBS is expected to unveil a new cost-cutting plan at its full-year results in early 2017, which sources said is likely to include job cuts and branch closures, and analysts said the stress-test result would delay RBS’s ability to pay dividends.
Additional reporting by Reuters
© Irish Examiner Ltd. All rights reserved