Lloyds Banking Group plc (LON:LLOY), together with seven other financial institutions in the UK, has been subject to the 2022 annual concurrent scenario stress test (ACS), conducted by the Bank of England (BoE). The 2022 ACS also assessed the ring-fenced subgroups of the participating banks on a standalone basis for the first time.
The Group is pleased to note that it has comfortably passed the stress test and given this strong performance, the Group is not required to take any capital actions. The BoE calculated the Group’s transitional CET1 ratio after the application of management actions as 11.6 per cent and its leverage ratio as 4.5 per cent. Despite the severity of the stress test scenario, and without the conversion of the Group’s AT1 securities into equity, the Group significantly exceeded the capital and leverage hurdle rates of 6.6 per cent and 3.5 per cent respectively.
The ring-fenced bank (RFB) also passed the stress test, with the BoE calculating the RFB’s transitional CET1 ratio after the application of management actions as 12.1 per cent, against the hurdle rate of 7.2 per cent.
The 2022 ACS scenario was designed to test the resilience of the UK banking system to deep, simultaneous recessions in the UK and global economies, with large falls in asset prices and higher global interest rates. The BoE stated at the outset of the exercise that the focus of this hypothetical scenario was to ensure that banks were able to absorb rather than amplify shocks, and continue to lend to UK households and businesses. The scenario was more severe than the last global financial crisis and combined rapidly rising interest rates and unemployment, in conjunction with significant falls in property prices and GDP. In particular, base rates rose to 6 per cent in the first year before gradually reducing to 3.5 per cent in subsequent years; inflation increased to 17 per cent and took five years to recover to the Bank of England’s 2 per cent target; GDP fell by 5 per cent in the first year, unemployment peaked at 8.5 per cent in the second year, and UK house and commercial property prices fell 31 per cent and 45 per cent respectively over the first three years. In addition to these economic factors, and in line with previous years, the stress scenario also reflected other risks such as conduct, alongside a traded risk scenario.
This year’s stress test was again run under the IFRS 9 accounting standard and required the immediate recognition of expected credit losses on a perfect foresight basis, rather than reflecting losses as they were incurred. The BoE assessed the stressed projections on an IFRS 9 transitional basis, in line with the phased implementation approach of the standard. Results are also shown on an IFRS 9 “fully-loaded” non-transitional basis. The Group as a whole, as well as the RFB separately, comfortably exceeded both the transitional and non-transitional hurdle rates in this stress test.
This result reflects Lloyds Banking Group’s prudent balance sheet management and strong capital position, having reported a CET1 ratio of 14.1 per cent and a UK leverage ratio of 5.6 per cent, post dividend accrual, at 31 March 2022. The Group also continues to be strongly capital generative with capital build over Q1 2023 of 52 basis points, including the accelerated full-year £800 million payment of fixed pension contributions for 2023.
Further details
Details of the BoE’s approach to the stress test and the detailed results in relation to all participating financial institutions are available from the BoE website.
