Co-Op assets cut after stress tests

Royal Bank of Scotland Group Plc and Lloyds Banking Group Plc, Britain’s two publicly owned lenders, barely passed the Bank of England’s first stress test, while Co-Operative Bank Plc failed.

Co-Operative Bank will now cut £5.5bn more assets by 2018 under a plan agreed with the regulator. RBS said it will sell £2bn notes to bolster capital. None of the banks will have to sell new stock.

The BOE follows its US and European counterparts in using stress tests to try to revive investor confidence in lenders. Six years after the financial crisis, shares of four of the UK’s five largest banks trade for less than their book value, or total assets.

“This was a demanding test,” said Bank of England governor Mark Carney. “The results show the core of the banking system is significantly more resilient, that it has the strength to continue to serve the real economy even in a severe stress.”

The UK’s eight biggest banks were probed on their resilience to shocks including a jump in the unemployment rate to 12%, a rise in the BOE benchmark interest rate to 4%, and house prices falling more than a third.

“The market wasn’t expecting any other bank to fail,” said Gary Greenwood, a Liverpool, England-based analyst at Shore Capital Group Ltd, who rates RBS and Lloyds a hold.

The stress test reduced RBS’s core capital ratio, a measure of financial strength, to 4.6%, based on end-2013 data, just above the 4.5% pass threshold. Lloyds came in at 5%, while Co-Operative Bank failed the assessment, ending up at -2.6%.

BoE said both Lloyds and RBS took actions in 2014 to address the shortage of capital and do not have to submit new plans to bolster resilience. In contrast, Co-Operative Bank was required to submit a new plan to shrink its balance sheet, which was accepted by the Prudential Regulation Authority.

Co-Operative Bank, which warned earlier this month it would fail the test, said it will try to cut residential mortgage assets and does not expect to be profitable before 2017.

“The bank is much stronger than a year ago,” said Co-Operative Bank chief executive officer Niall Booker said. “Given we are in the early stage of our plan, the original capital deficit and the nature of our assets, it is no surprise that we have not met the severe stress test hurdle today.”