Stress tests push RBS dividend hopes back

The dividend wait for Royal Bank of Scotland investors is set to be prolonged further still after European stress tests ranked the part-nationalised institution among the region's worst performing banks for capital strength.

Using a scenario of a three-year downturn, the European Banking Authority (EBA) said that RBS could lose more than seven percentage points of capital. For Christian Barua, a banking analyst at Bernstein, the test puts to bed any dividend hopes until "at least the end of next year".

The lender, which is still 73% owned by the taxpayer, has not paid a dividend since the financial crisis and its shares are far short of the 500p a share seen during government bail-outs.

RBS's capital buffer was reduced to 8.1% following the drop of 7.5%, the third worst among all those tested. The slow progress in its decade-long struggle to return to full health will be highlighted again on Friday when the NatWest lender reports another sizeable loss.

The latest assessment by the EU's banking authority was the last thing investors needed to hear in a sector already shorn of confidence as a result of Brexit fears and the prospect of margin-hurting negative interest rates.

Alongside RBS, the process involving 51 European institutions raised concerns about the performance of Barclays after the EBA found that its capital ratio (CET1) would fall from 11.4% to 7.3% under the stress tests.

Deutsche Bank analysts expressed surprise at the outcome for Barclays but noted that the test was carried out on a static balance sheet assumption and did not take into account the changes in strategy announced at the time of 2015 results.

They added: "These actions should add more than 100 basis points to the CET1 over times - and reported CET1 was at 11.6% at H1 this year."

Among the other UK banks, HSBC's capital fell to 8.7% and Lloyds Banking Group stood at just above 10%. The Bank of England, which also carries out its own tests, said the EBA research was evidence that major UK banks have the "resilience necessary to maintain lending to the real economy".

There was no pass or fail mark for the EBA tests.

Ewen Stevenson, RBS's chief financial officer, said the stress tests demonstrated the bank's continued progress towards transforming the RBS balance sheet to being safe and sustainable.

He added: "Over recent years we have materially strengthened our CET1 ratio, substantially reduced our balance sheet and leverage, and continued to de-risk our asset exposures.

"We are confident that in delivering our strategy, we will transform RBS into a low risk, resilient bank."

RBS will report another heavy loss in results for the three months to June 30. The figures on Friday will be driven by a familiar story of restructuring and misconduct costs.

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