Royal Bank of Scotland is to embark on fresh cost-cutting after failing an annual health check.
The state-backed lender will have to bolster its balance sheet to the tune of £2 billion as it emerged as the worst performer in tough Bank of England stress tests.
Edinburgh-headquartered RBS, which remains 72 per cent owned by the taxpayer following its bailout at the height of the financial crisis, said it had now drawn up a plan to bolster its resilience in the event of a fresh economic shock.
Under the “very severe” central bank tests, lenders had to be able to cope with a house-price crash in the UK and the impact of a potential global recession.
RBS chief financial officer Ewen Stevenson said: “We are committed to creating a stronger, simpler and safer bank for our customers and shareholders.
“We have taken further important steps in 2016 to enhance our capital strength, but we recognise that we have more to do to restore the bank’s stress resilience, including resolving outstanding legacy issues.”
The Gogarburn-based banking giant, led by chief executive Ross McEwan, said it has agreed a revised capital plan with the Bank of England’s Prudential Regulation Authority (PRA) “in light of the various challenges and uncertainties facing both the bank and the wider economy”, although it is not set to tap markets for extra finance.
Those steps include further reductions in its cost base, the sale of non-core loans and a reduction in assets held by its commercial banking arm.
RBS came close to failing a stress test last year, while a test by the European Banking Authority in the summer revealed that the lender would be the third worst hit in a new economic crisis.
Laith Khalaf, senior analyst at financial services firm Hargreaves Lansdown, said: “[RBS] is still in the process of restructuring its business.”
“However, RBS is in no immediate danger, barring a repeat of something akin to the financial crisis, and it’s important to bear in mind that the 2016 stress test uses an extremely severe economic scenario to challenge the resilience of the UK banks to financial shocks.”
Mike van Dulken, head of research at financial firm Accendo Markets, said: “The UK’s weakest bank – RBS – is still just that, almost a decade after the financial crisis began and the UK taxpayer had to bail it out for £45bn. Outstanding legal challenges remain a real problem, especially in the US.”
Bank of England governor Mark Carney said that since the plans put in place by RBS, Barclays and Standard Chartered to address weaknesses, UK lenders would be able to “withstand what is a very severe shock”.
The central bank also gave detail on its 2017 test of the banking sector, which will see it introduce a second test and will cover a seven-year period, looking at “severe headwinds” that could put profits under pressure.
Britain’s exit from the EU could also see banks forced to adapt as they face lower interest rates for longer and uncertainty over Brexit negotiations.