Banking & Finance

Standard Chartered gets stress test pass from Bank of England

Despite its capital level falling below the minimum requirement, bank’s US$5.1 billion rights issue prevented the need to draw up a new capital plan

PUBLISHED : Tuesday, 01 December, 2015, 6:10pm
UPDATED : Tuesday, 01 December, 2015, 6:10pm

Shares in Standard Chartered and HSBC Holdings climbed when the market opened in London on Tuesday after both banks passed a test gauging the strengths of their capital bases in the event of a severe financial meltdown focused on China.

Standard Chartered showed the weakest performance of the seven banks tested by the Bank of England. The virtual crisis ate away 5.4 per cent of its common equity tier 1 capital (CET1), the core of the regulatory buffer that global banks have been required to build. That pushed its capital level below the minimum requirements of 6 per cent.

Still, the bank outperformed market expectations. Standard Chartered’s share price rose 1.76 per cent to 567 pence at 8.50am in London after the Bank of England said it would not require the bank to issue a new capital plan.

Given the capital raise, AT1 issuances and deleveraging, the bank’s capital concerns are in the past
Chirantan Barua, Sanford C Bernstein

“In light of Standard Chartered’s recent strategy review and the associated steps taken to strengthen its capital position, the [Prudential Regulation Authority] Board did not require Standard Chartered to submit a revised capital plan,” the Bank of England said in the test results.

In early November, Standard Chartered announced a US$5.1 billion rights issue after more than a year of speculation about the bank’s capital levels. The test, which was based on capital levels at the end of 2014, also did not factor in the US$2 billion in additional tier 1 [AT1] capital the bank raised in April.

Under the direction of new chief executive Bill Winters, the bank hopes to boost its CET1 ratio to 13 per cent from the 11.4 per cent at the end of September.

“Given the capital raise, AT1 issuances and deleveraging, the bank’s capital concerns are in the past,” Sanford C Bernstein analyst Chirantan Barua said in a note to investors.

HSBC held up better than its cross-town rival, losing just 3.9 per cent of CET1. Shares in the bank climbed 1.45 per cent to 537.2 pence.

HSBC announced in June that it would cut out US$290 billion in risk-weighted assets from its global balance sheet and reinvest many of those assets in higher-growth markets.

The test simulated a major economic slowdown in China and Hong Kong, markets from which HSBC and Standard Chartered derive hefty portions of of their revenue.

The Bank of England applied a slowdown in mainland China’s gross domestic product growth from 7.5 per cent at the end of 2014 to just 1.7 per cent, as well as a 35 per cent drop in housing prices. For Hong Kong, the test modelled a 45 per cent fall in commercial real estate prices.