(The author is a Reuters Breakingviews columnist. The opinions expressed are his own)
By George Hay
LONDON, Dec 3 (Reuters Breakingviews) - The great UK bank capital probe puts heat on Royal Bank of Scotland (RBS.L). The Bank of England warned on Nov. 29 that the domestic banks it regulates may not be setting aside enough to deal with future losses. Making definitive judgments about who this affects isn’t easy. RBS won’t be the only to attract attention. But the state-dominated lender could well find itself fielding some of the first questions.
Take RBS’s commercial property loan book. At 66 billion pounds, it’s more than double the size of the 30 billion pounds of real estate assets held by domestic peer Lloyds Banking Group. But RBS only holds 9.5 billion pounds of provisions against its book – just over 14 percent. Lloyds’s (LLOY.L) provisions cover over a quarter of its holdings.
That doesn’t mean RBS is definitely under-provisioned. Lloyds’ painful HBOS legacy meant that as of June it had suffered an incredible 92 percent impairment rate on its Irish property assets, of which provisions covered 68 percent. RBS’s Irish damage – a 73 percent impairment rate and a lower 55 percent coverage rate - may just be because its assets are of a better quality.
Yet RBS’s own disclosure hardly inspires hope. Over a third of its overall property exposure – 23.7 billion pounds – are very high loan-to-value assets that have defaulted, and it’s not yet certain the allotted provisions will cover the ultimate losses. If RBS had to hold the same level of provisions as Lloyds it would need to find another 10 billion pounds, according to Mediobanca.
The BoE isn’t only interested in banks' suspect property assets. Its latest Financial Stability Report also frets that the loans made by UK banks to vulnerable euro zone countries carry lower provisions than those held by the states’ own domestic banks. If loan quality is the same – which, again, it might not be – then UK banks would need another 15 billion pounds in provisions, the FSR says.
Given that the UK taxpayer holds a 81 percent stake in RBS, the temptation may be to sweep these issues under the carpet. One way or another the UK Treasury would have to pick up the bill and UK debt remains uncomfortably high. But now the BoE has dropped its bombshell, any banks that have been fudging their provisions will have fewer places to hide.
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- The Bank of England’s recommended on Nov. 29 that the Financial Services Authority take action to ensure that the capital of UK banks reflected a proper valuation of their assets, a realistic assessment of future conduct costs and prudent calculation of risk weights. - For previous columns by the author, Reuters customers can click on [HAY/]
(Editing by Robert Cole and David Evans)
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