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With exquisite timing, both Lloyds Banking Group (LSE:LLOY) and Royal Bank of Scotland (LSE:RBS) issued updates regarding their capital positions this morning in advance of today’s visit by representatives of the International Monetary Fund (IMF) with Chancellor George Osborne. As expected, the IMF urged Osborne to divest the taxpayers’ stake in both banks as quickly as possible, saying that “public ownership of the banks isn’t in the interests of economic recovery.”
In the true spirit of carpe diem, the CEO’s of both banks were quick to point out that they are positioned for a return to private ownership. Stephen Hester was also quick to capitalize on the day, announcing that the board is “pleased with RBS’s progress and momentum towards completing [our]return to full financial health. Our balance sheet has been transformed and our core business has plentiful surplus funding to support continued growth in lending.” António Horta-Osório may have outshone his peer by spinning the success of Lloyds’ “customer-focused strategy.” My immediate personal reaction to Horta-Osório’s remark was, “Oh no! The banks are out to get us again! Wasn’t PPI mis-selling customer-focused?”
The truth is that both banks are well on their way to improving their Tier 1 Capital Ratios and coming out from under government control. Taxpayers currently own a 39% stake in Lloyds and an 81% stake in RBS. Both banks reported that their individual plans are on target to reach their goals without having to seek out additional capital. We know that UK banks in total have a £25 billion shortfall of capital as recently reported by the Financial Policy Committee, but we can only speculate how that shortfall is divided between the individual banks. At any rate, the banks will continue to raise capital by selling off non-core and poorly performing assets and through other profitable operational practices (not including mis-selling PPI or Libor rate fixing).
Obtaining and maintaining an acceptable Tier 1 Capital Ratio will be an essential prerequisite to the banks’ return to privatization. That ratio is calculated by comparing the banks core equity capital versus its risk-weighted assets. In order to be considered well-capitalized, the bank’s Tier 1 ration must be 6% or higher and the bank may not be distributing dividends or other funds that would impact its capital position. Banks that do not meet regulator standards are considered to be under-capitalized and they are, therefore, required to establish and followed an approved capital restoration plan, and they are prohibited by law from paying dividends and certain other distributions.
Horta-Osório said today that he expects Lloyds’ Tier 2 ratio to be “above 9% by the end of 2013 and above 10% by the end of 2014, adding that Our strong capital position enables the Group to actively support growth and lending in the UK economy as well as delivering sustainable results for our shareholders.”
The report from RBS this morning simply referred to its progress toward meeting “regulatory capital model requirements” whilst not providing any particulars beyond what was already contained in their first quarter results.
Whilst the IMF and the Chancellor appear to be a bit at loggerheads, as expected, the Bank of England has made it clear that it does not intend to change its current approach to the economy. Meanwhile David Cameron is in Brussels on a mission to encourage “the international community . . . to work together to stop multinationals aggressively playing one country’s tax code off against another’s.”
Just when we get close to resolving one economic issue, another one comes around the corner. At least the banks are recovering and apparently on their way to good health. We should all be thankful for that.
