The Bank of England published its 2017 stress test results for the UK banks in November. The Bank of England started testing banks’ capital positions in 2014, and this is the first time since then that no bank has needed to strengthen its capital, which came as a relief for some banks.
This is especially the case for Royal Bank of Scotland (RBS), which had failed the test year after year. In this year’s stress testing, the Bank of England used an economic scenario that was more severe than the global financial crisis.
The test used a GDP decline of 4.7%, interest rate of 4%, and a 33% fall in house prices. The test results under this scenario showed that even under this severe downturn, UK banks would be able to continue lending and indicated that they are three times stronger than they were 10 years ago.
All in all, no bank would need extra capital injections as a result. UK banks’ common equity/bank risk-weighted assets stood at 13.4% in 2016 versus 4.5% in 2008, and following the stress test scenario, the capital ratio would fall to 8.3%, which is above the minimum standard. In the 2016 stress test, while HSBC (HSBA), Lloyds (LLOY), Nationwide (NBS), Santander, and Standard Chartered (STAN) met the minimum capital requirement level, Barclays (BARC) and Royal Bank of Scotland failed.
However, in 2017, all the banks passed the hurdle level. In our view, these stress test results strengthen investor confidence toward the UK banking space, which has been under pressure due to the uncertainty and impact of Brexit.
Fintech Transforming the Banking Sector
As we pointed out in our previous quarterly update, higher levels of collaboration between fintech companies and retail banks are here and happening with more news and activity between fintech and the banking space continuing during the quarter.
We attended the European Retail Banking conference held in Amsterdam, which was themed around fintech and banking collaborations. Several fintech firms that presented at the conference were, in our view, seeking potential buyers to make the most of funds available from banks. Most banks have now set up fintech funds enabling them to increase this activity.
For example, ING in the Netherlands announced in October 2017 that ING Ventures, a new investment fund set up by ING Group, has €300 million to pump into fintech companies. ING management has indicated that the fund was set up to accelerate the pace of digitalisation and innovation, and it aims to expand the fund in the coming year.
So far, ING has collaborated with 115 fintech partnerships and investments globally. Although on a smaller scale, other Dutch banks ABN AMRO and Rabobank also have fintech funds of around €10 million and €40 million, respectively. We expect similar fund activities to increase within European banks in coming quarters as banks seek to catch up with technology and innovation, and increase their digitisation exposure in the hope of reducing cost.
