Provisionally creaking

Last Updated: Mon, Dec 03, 2012 22:02 hrs

The great UK bank capital probe puts heat on Royal Bank of Scotland. The Bank of England warned on November 29 that the domestic banks it regulates may not be setting aside enough to deal with future losses. Making definitive judgments about who this affects isn’t easy. RBS won’t be the only to attract attention. But the state-dominated lender could well find itself fielding some of the first questions.

Take RBS’s commercial property loan book. At £66 billion, it’s more than double the size of the £30 billion of real estate assets held by domestic peer Lloyds Banking Group. But RBS only holds £9.5 billion of provisions against its book — just over 14 per cent. Lloyds’s provisions cover over a quarter of its holdings.

That doesn’t mean RBS is definitely under-provisioned. Lloyds’ painful HBOS legacy meant that as of June it had suffered an incredible 92 per cent impairment rate on its Irish property assets, of which provisions covered 68 per cent. RBS’s Irish damage — a 73 percent impairment rate and a lower 55 per cent coverage rate — may just be because its assets are of a better quality.

Yet, RBS’s own disclosure hardly inspires hope. Over a third of its overall property exposure — £23.7 billion — are very high loan-to-value assets that have defaulted, and it’s not yet certain the allotted provisions will cover the ultimate losses. If RBS had to hold the same level of provisions as Lloyds it would need to find another £10 billion, according to Mediobanca.

The BoE isn’t only interested in banks’ suspect property assets. Its latest Financial Stability Report also frets that the loans made by UK banks to vulnerable Euro zone countries carry lower provisions than those held by the states’ own domestic banks. If loan quality is the same — which, again, it might not be — then UK banks would need another £15 billion in provisions, the FSR says.

Given that the UK taxpayer holds a 81 per cent stake in RBS, the temptation may be to sweep these issues under the carpet. One way or another the UK Treasury would have to pick up the bill and UK debt remains uncomfortably high. But now the BoE has dropped its bombshell, any banks that have been fudging their provisions will have fewer places to hide.

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