Comment: Stressed out Lloyds | EU woes

LLOYDS Banking Group got a shock yesterday as it appeared the pace of any restoration of dividends at the bank may be slower than hoped, given how it has fared in the European regulators’ stress tests on the capital backing of leading financial institutions.

Martin Flanagan

The lender emerged as the weakest of the four British clearers in the balance sheet tests conducted by the European Central Bank and the ­European Banking Authority. These require big European banks to have a minimum core equity tier 1 ratio – the capital backing for their loanbooks – of 5.5 per cent.

Lloyds only squeaked through, at 6.2 per cent, compared with ratios of 6.7 per cent at Royal Bank of Scotland, 7.1 per cent at Barclays and 9.3 per cent at HSBC. This may mean Lloyds has to stash more money on its balance sheet that might otherwise have been used to start paying dividends again, after it was banned by the European Union from doing so as the price for the bank’s taxpayer bailout in 2008.

The timing is not brilliant, coming just before today’s new three-year strategy for Lloyds, to be unveiled by chief executive Antonio Horta-Osorio.

That strategic update was never thought likely to include much on the dividend, anyway, given the bank’s continuing talks with UK regulators on restoration of some “gesture” payout at the final results next February. But the divi issue recedes further now following the surprise European test outcomes. Lloyds faces further balance sheet tests from the UK regulator, the Prudential Regulation Authority under the aegis of the Bank of England, in December. These are tougher than those in the EU, assuming a house price fall of 35 per cent and interest rates rising from the current 0.5 per cent to 6 per cent.

In other words, the perceived strength of Lloyds’s business model as the UK’s biggest retail bank, with relatively little in wholesale or overseas banking, may now be somewhat of an Achilles heel in terms of capital buffers and dividend restoration.

The EU imbroglio goes from bad to worse

David Cameron is now boxed into a corner, insisting that limiting freedom of labour movement within the European Union is a red line issue for him. Brussels says this is impossible. Wiggle room looks all but non-existent if Cameron’s Conservatives win next year’s general election.

Not quite pouring oil on troubled waters, the EU has now warned Britain it must cough up €2.1 billion (about £1.7bn) to the EU budget because its economic recovery has been stronger than its single market sister nations.

Defence Secretary Michael Fallon says we are getting “swamped” by foreign migrants, then retracts his comment amid the resulting firestorm. If the single market was a person, it would be on a psychiatrist’s couch.