Banking stress tests get a relaxed response from investors

“However, investors should be aware that the stress tests assume that banks would slash their dividends in 2018 to preserve cash and it seems unlikely such a move would be welcomed by income-hungry portfolio builders, especially as the 6%-plus dividend yield on offer from Lloyds and the 5.4% available at HSBC form a key plank of the investment case for both stocks.

“Nevertheless the Bank of England’s conclusion that no big bank needs to raise additional money does reflect how so-called equity and leverage ratios have consistently improved as the big banks have in effect shrunk themselves back to health, cutting costs, selling non-core assets and restraining their loan books.

“The Bank of England is still taking no chances, however as it is insisting that the major lenders hold an extra slice of capital to protect themselves, the so-called contracyclical capital buffer.

“The tests show that RBS and Barclays have the lowest margin for error in the event the Bank of England’s stress-test scenario comes to pass and this may be reflected in their relatively lowly valuations. In each case their share prices trade below the net asset value, or book value per share of their assets on their balance sheet, a calculation which assumes what would be left for investors in the hypothetical scenario that the banks are wound up, their assets sold and liabilities repaid.

“This suggests that RBS and Barclays have yet to fully convince investors that all is well, although perhaps the biggest doubts currently hang over Barclays, given how badly its shares have done this year, even as global banking shares have rallied, including those of RBS.”

Source: Thomson Reuters Datastream, Digital Look, Company accounts (using Q3 2017 book value per share), analysts’ consensus forecasts