* State-backed RBS needs about 2 bln stg in additional
* Bank of England sees challenging outlook for financial
* RBS shares fall as much as 4.6 percent
* Lender says will meet shortfall through cost cuts, asset
* Graphic: RBS's legal headaches tmsnrt.rs/2eV4Ihz
(Adds graphic on stress tests)
By Huw Jones and David Milliken
LONDON, Nov 30 Royal Bank of Scotland
(RBS) will cut costs and sell assets to boost capital, it
said on Wednesday after failing its Bank of England stress test,
with the central bank warning of a "challenging" outlook for
Britain's financial system.
State-backed RBS rushed out a statement after the test
results to say it would take a range of actions to make up the
capital shortfall identified, amounting to about 2 billion
pounds ($2.49 billion).
Shares in RBS, which was bailed out by UK taxpayers eight
years ago, fell 4.6 percent to 188 pence before reducing losses
to 2.9 percent at 1139 GMT.
The unexpected result underlines the litany of problems with
which RBS is grappling, including a mounting legal bill for
misconduct before the 2008 financial crisis and difficulties
selling off assets such as its Williams & Glyn banking business.
The Bank of England (BoE) approved RBS's new capital plan on
"Its challenge is that it still has legacy issues ...
There's misconduct costs, there's impaired assets, they're still
working through the so-called non-core assets, on which they
have made progress," BoE Governor Mark Carney told reporters on
"They are not talking about raising capital. The magnitude
of their plan is much bigger than the size of the shortfall in
the stress test."
RBS, which is expected to settle soon with U.S. authorities
over alleged mis-selling of mortgage backed securities in the
run-up to the financial crisis, said the measures approved by
the BoE should mean that it does not have to tap markets to
cover the capital shortfall.
The bank is unlikely to have to sell any major assets and
will instead raise the additional capital by reducing exposures
in sectors including commercial property, oil and gas, a source
at RBS said.
JOB CUTS, BRANCH CLOSURES?
Asset sales would avoid the embarrassment of a rights issue,
that would force the government to put in even more taxpayer
money, given that it owns the majority of the shares.
RBS is expected to unveil a new cost-cutting plan at its
full-year results in early 2017, which the source at the bank
said is likely to include job cuts and branch closures, and
analysts said the stress-test result would further delay RBS's
ability to pay dividends.
"It is going to be very difficult. They have been doing this
for a while," said Julian Chillingworth, Chief Investment
Officer at Rathbone Brothers, an RBS shareholder.
Chillingworth remains confident in RBS Chief Executive Ross
McEwan, describing him as "on the case". Chillingworth said that
the biggest worry would be if McEwan were to quit "because this
is as much a political job as it is a banking job".
Barclays also fell short by some measures in its
stress test but will not have to submit a new capital-raising
plan because it has already announced steps to strengthen its
defences, including the planned sale of its African business,
the BoE Financial Policy Committee (FPC) said.
Standard Chartered missed the test's minimum Tier 1
capital target but also escapes the need for new capital-raising
because of steps already taken to cut costs and sell assets.
The performance of the seven lenders tested was worse than
many market participants had expected.
"This is the highest average fall in CET1 (a measure of
capital) and leverage ratios we've seen in the history of a UK
concurrent stress test," said Steven Hall, banking partner at
This year's health check, the third by the Bank of England
since the 2007-09 financial crisis forced taxpayers to bail out
lenders such as RBS, was the toughest yet. Test scenarios
combined shocks to both global and domestic economies, as well
as the impact of potential misconduct fines.
Britain's banking system underwent a severe real-life test
in June, when markets and sterling plummeted in response to
Britain's vote to leave the European Union, and the Bank of
England said on Wednesday that Britain's financial system faces
elevated Brexit risks and market volatility after the U.S.
HSBC, Lloyds Banking Group, Nationwide and
Santander UK did not reveal any capital inadequacies in
the test, the central bank said, adding that the level of
capital in the UK banking system was satisfactory overall at
13.5 percent of risk-weighted assets.
The Bank of England also gave more detail on a second stress
test that will be introduced next year alongside its annual
check, saying that it will cover a seven-year period -- compared
with five in the basic test -- and look at "severe headwinds"
Banks could be required to change business models to make
them more sustainable in the face of prolonged low interest
rates and uncertainty over Britain's future relations with the
EU after it leaves the bloc.
The Bank of England is now developing a system-wide test to
assess the dynamics of broader markets under stress and will
conduct an in-depth assessment of risks from derivatives trades.
The FPC also published on Wednesday an assessment of
insurers' investment activities, concluding that changes are
needed to the EU's Solvency II insurance rules.
($1 = 0.8018 pounds)
(Additional reporting by Lawrence White, Andrew MacAskill and
Simon Jessop; Editing by Rachel Armstrong and David Goodman)