RBS to bolster capital after failing stress test

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LONDON: Royal Bank of Scotland (RBS) will cut costs and sell assets to boost capital, it said on Wednesday after failing its Bank of England stress test, with the central bank warning of a “challenging” outlook for Britain’s financial system.
State-backed RBS rushed out a statement after the test results to say it would take a range of actions to make up the capital shortfall identified, amounting to about 2 billion pounds ($2.49 billion).
Shares in RBS, which was bailed out by UK taxpayers eight years ago, fell 4.6 percent to 188 pence before reducing losses to 2.9 percent at 1139 GMT.
The unexpected result underlines the litany of 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 (BoE) 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,” Mark Carney, governor of BoE, told reporters on Wednesday.
“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, a source at RBS said.
Asset sales would avoid the embarrassment of a rights issue, that would force the 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 the source at the bank said is likely to include job cuts and branch closures, and analysts said the stress-test result would further delay RBS’s ability to pay dividends.
“It is going to be very difficult. They have been doing this for a while,” said Julian Chillingworth, Chief Investment Officer at Rathbone Brothers, an RBS shareholder.
Chillingworth remains confident in RBS CEO Ross McEwan, describing him as “on the case.” Chillingworth said that the biggest worry would be if McEwan were to quit “because this is as much a political job as it is a banking job.”
Barclays also fell short by some measures in its stress test but will not have to submit a new capital-raising plan because it has already announced steps to strengthen its defenses, including the planned sale of its African business, the BoE Financial Policy Committee (FPC) said.

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