Bank stocks rattled by UK capital and Brexit concerns

Irish banking stocks fell in Dublin on Tuesday as the Bank of England ordered lenders with businesses in the UK hold additional capital to absorb losses in the event of a sudden downturn.

Sentiment towards the sector was further dented as UK prime minister Boris Johnson put the threat of a no-deal Brexit back on the table as he outlined plans to legislate to ensure the transition phase of the European Union withdrawal will not extend beyond the end of 2020.

Shares in Bank of Ireland and AIB, both of whom have operations in the UK, fell by 3.8 per cent and 5 per cent respectively.

The Bank of England said on Monday evening that it was increasing the amount of capital it demands that banks must set aside to protect them from a sudden economic deterioration – adding to the regulatory capital pressures faced by lenders since the outset of the financial crisis.

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The Bank of England increased the so-called countercyclical capital buffer requirement for the end of next year from 1 per cent of risk-weighted assets to 2 per cent.

Davy analysts Diarmaid Sheridan and Stephen Lyons estimate that this will likely contribute to Bank of Ireland and AIB increasing their own common equity Tier 1 capital (CET1) ratio – a key measure of a bank's reserves that are there to withstand a shock loss – targets by half a percentage point each to 15.5 per cent and 14 per cent respectively. The internal targets will also be fuelled by an expected introduction of a systemic risk buffer by the Central Bank next year.

Banking stocks in London also succumbed to strong selling pressure on Tuesday as investors focused on the countercyclical buffer order rather than news, which was widely expected, that all the main seven UK banks had passed annual stress tests for the third year in a row. The latest round of tests assessed lenders’ ability to cope with the blow to the financial system worse than a no-deal Brexit.

Meanwhile, Ulster Bank paid a €500 million dividend to its parent, Royal Bank of Scotland, on Tuesday as it continued to dip into its excess capital reserves to return some of its bailout money.

The latest instalment bring to €3.5 billion that has been repaid by way of dividends to RBS since late 2016. The total figure is the equivalent of almost 20 per cent of the £15 billion (€17.7 billion) that Ulster Bank received from RBS during the financial crisis.

The bank’s CET1 ratio will remain the highest among the country’s five remaining banks, at 27 per cent, after the payment. The wider RBS group has a medium-term target ratio of about 14 per cent.

"With a 27 per cent CET1 ratio, Ulster Bank still has significant wherewithal to continue paying capital to its parent," said Eamonn Hughes, an analyst with Goodbody Stockbrokers.