RBS (RBS) has a capital shortfall of between £3bn and £4bn according to analysis of a Bank of England (BoE) stress test published today.
Under a severe economic shock scenario tested by the BoE, RBS's key capital ratios would decline to levels weaker than minimum regulatory thresholds.
Core Equity Tier 1 (CET1) capital, the key measure of financial strength, would fall to 5.5%, which UBS analyst Jason Napier says equates to a £3bn to £4bn capital gap.
MITIGATING ACTION
Management action - via cost cutting and more conservative lending policies if a downturn emerged - would potentially reduce the additional capital required. In addition, RBS can issue new securities which qualify as regulatory capital without calling directly on shareholders.
After taking both of these options into account, RBS's capital shortfall declines to around £1bn and £1.8bn, Napier writes in a note published today.
Most of the actions RBS needs to take to shore up its capital base are already known to the market, Napier adds.
COST CUTTING
'We believe this plan, which includes cost cuts, asset disposals and further capital management, mostly is the formal inclusion of measures planned and known by the market,' writes Napier.
'We expect a bigger cost and restructuring plan in February - with associated capital costs - and colour around non-core, low return assets within the Commercial Bank, including £8.5bn in risk-weighted assets.'
Uncertainty over RBS's capital position remains however, because of the delayed sale of its Williams & Glynn retail bank unit as well as potential fines from the US Department of Justice over the sale of mortgage-backed securities.
But the BoE says fines for misconduct were included in its models and may have allowed for penalties higher than currently expected.
MISCONDUCT FINES
'There is a very high degree of uncertainty around any approach to quantifying misconduct cost risks facing UK banks,' says the report.
'The stressed projections relate to known past misconduct issues, such as mis-selling of payment protection insurance and misconduct in wholesale markets. They have been calibrated by Bank staff to have a low likelihood of being exceeded.
'They are therefore, by design, much larger than the amounts that had already been provided for by banks at end-2015. However, partly because they relate only to known issues, they cannot be considered a ‘worst case’ scenario.'
RBS today has a market value of £22.4bn even after a £20 billion capital injection by the UK government in 2009 and tens of billions raised from shareholders over the last decade.
RBS shares trade 3.7% lower at 190p.
