March 27, 2014 8:53 am

Fed stress test results to hit RBS’s Citizens division hardest

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A branch of The Royal Bank of Scotland in London©Getty

Of the three foreign banks that suffered the ignominy of having their capital plans fall foul of the US Federal Reserve’s stress tests, the failure is likely to be most painful for Royal Bank of Scotland.

It is almost certain to delay RBS’s plan to file for an initial public offering of Citizens, its US network of 1,400 branches, which it had been expected to do before this summer in order to sell shares in the second half of the year.

The sale of Citizens is a central pillar of RBS’s plan to rebuild its enfeebled balance sheet. This is essential for the bank, which is still 81 per cent owned by the UK taxpayer after being bailed out by the government in 2008.

The Edinburgh-based bank’s capital position fell close to regulatory minimums after it suffered heavy losses of more than £8bn last year. At the end of December its core tier one equity ratio, a measure of how much capital it has as a percentage of risk-adjusted assets, fell to 8.6 per cent – well below most big rivals.

RBS, like fellow stress test failures Santander and HSBC, said it would resubmit its capital plan to the Fed. The US regulator identified “deficiencies in RBS Citizens’ practices for estimating revenue and losses under a stress scenario and for ensuring the appropriateness of loss estimates across business lines given a specific stress scenario”.

RBS has attracted some interest from potential suitors for Citizens, which it values at more than £10bn, such as Canada’s TD Bank and Japan’s Sumitomo Mitsui Financial Group. But analysts said the flunked stress test reduced the likelihood of it being sold outright.

Ian Gordon, analyst at Investec, said there was a “reduced probability of a left-field bidder emerging near-term . . . and at the margin, potential adverse impact on pricing at IPO”. RBS shares were down 1.5 per cent at 305.4p in late trading on Thursday.

RBS said the Fed would allow its US arm to pay the same dividend to its UK parent as it did last year, when it paid an ordinary dividend of $170m as well as a $1bn special dividend to finance the issue of debt that counts as capital in a stress test.

Bruce van Saun, chief executive of RBS Citizens Financial Group, said: “We clearly have more work to do to meet the Fed’s standards, and we’re fully committed to doing that.”

It is the first time the Fed has put foreign-owned banks through its stress test and capital plan review process and the regulator said it often objects to banks’ debut plans. It also said the objections were of a qualitative nature – concerning the controls and models used by the banks, rather than the level of capital they hold.

Three other foreign banks had their US operations included in the Fed’s stress tests for the first time and passed – Canada’s Bank of Montreal, Spain’s BBVA and Japan’s Mitsubishi UFJ Financial Group.

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