(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
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)
Keywords: BREAKINGVIEWS BANKS/
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