Lloyds dividend hopes under threat from UK banks stress test

Tue Dec 9, 2014 9:12am EST
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By Matt Scuffham

LONDON (Reuters) - Lloyds Banking Group Plc (LLOY.L: Quote) risks rejection of its plans to pay a dividend for 2014 unless it performs strongly in a British test of its financial health, results of which are due to be published next Tuesday.

Lloyds, along with state-backed rival Royal Bank of Scotland (RBS.L: Quote), only narrowly passed a test by European regulators in October and now faces a more stringent examination by the Bank of England (BoE).

The BoE is testing how resilient Britain's biggest eight lenders would be in the face of a slump in house prices and higher interest rates and some analysts believe Lloyds is vulnerable in the test, which adds extra elements on top of those applied by Europe.

Industry sources say the emphasis on home loans in the BoE test means Lloyds, along with mutually owned Nationwide POB.p.L, Britain's two biggest mortgage providers, will come under pressure. "Lloyds will pass but it won't be the strongest pass," one of the sources told Reuters.

Lloyds has said it is confident it will pass.

The BoE is expected to order banks which fail or narrowly pass the test to take actions to strengthen their capital, which could include dropping or scaling back their dividends.

Banks will have to show that they would still have a core capital ratio of at least 4.5 percent of risk-weighted assets in stress scenarios including a 35 percent drop in house prices and a rise in interest rates to 6 percent.

Analysts at Citi expect Lloyds to pass the test, holding core capital of 5.7 percent under the stresses, though this would be the weakest result among Britain's biggest four banks.   Continued...

Signs are seen outside a branch of Lloyds Bank in central London October 28, 2014. REUTERS/Andrew Winning