(Bloomberg) -- Barclays Plc was the worst performer among 48 banks in Europe’s toughest stress test yet, underscoring the vulnerability of U.K. lenders to weak growth, credit losses and Brexit.
Fellow British lender Lloyds Banking Group Plc didn’t fare much better in the test, with a key measure of financial health falling sharply in the most adverse scenario envisioned by supervisors. The British banks fared worse than German lenders such as Deutsche Bank AG and counterparts in Italy, which are grappling with a slump in the nation’s bonds amid turmoil sparked by its populist government.
The stress test from the European Banking Authority, which has no pass or fail grade, assumes a scenario with shocks such as years of negative economic growth, weak bank profitability and a rise in government bond yields, amid Brexit-related uncertainty. While all the banks had enough capital to withstand even the harshest outcomes, investors watch their level of resilience closely because it helps supervisors determine if banks need to add capital and what level of shareholder dividends and staff bonuses they can pay out.
The result may be a setback for Barclays Chief Executive Officer Jes Staley’s plans to boost returns for shareholders, according to Michael Huenseler, who helps oversee about 22 billion euros at Assenagon Asset Management. It’s also “not helpful” for the CEO in his dealings with Edward Bramson, the activist investor agitating for a change in strategy at the U.K. bank, he said.
Staley has previously said he’s wary of the risks lingering in consumer debt as the U.K. faces uncertainty over Brexit. He has also said he’s concerned that disruption to supply chains and the economic repercussions from a hard Brexit could eventually hurt his business customers. Still, in a statement Friday, Barclays downplayed the importance of the latest results.
The London-based bank said the EBA test didn’t take into account business strategies and management actions since the end of 2017 or future initiatives. It also said its capital requirements will mainly be informed by the Bank of England’s own stress test results on Dec. 5.
“The U.K. economic scenarios were worse than for the Euro zone in the adverse scenario – so it’s not really a comparable test,” said Joseph Dickerson, a bank analyst in London with Jefferies Group LLC.
Gary Greenwood, an analyst at Shore Capital, said Barclays has a “green light” to buy back preferred shares and is talking about share buybacks, so there doesn’t appear to be any concern around capitalization. Staley said last month that his firm was ready to take on U.S. rivals after recording “the best performance of any bank to report thus far” for the third quarter.
In Italy, bank shares have plunged recently as the populist government challenges European Union rules to ramp up deficit spending next year. German lenders have been buffeted by a a particularly harsh scenario that assumes a steeper drop in gross domestic product than the rest of the EU.
The EU legal minimum for CET1 is 4.5 percent of risk-weighted assets, though supervisors generally set higher requirements on a bank-specific basis. Here are some other key results published on Friday, which show the banks’ fully loaded common equity Tier 1 ratios in the test’s adverse scenario:
| Bank | CET1 Ratio in Adverse Scenario |
| Barclays | 6.37% |
| Lloyds Banking Group | 6.8% |
| SocGen | 7.61% |
| Deutsche Bank | 8.14% |
| BNP | 8.64% |
| HSBC | 9.18% |
| Santander | 9.2% |
| UniCredit | 9.34% |
| RBS | 9.92% |
| Credit Agricole | 10.21% |
| ING | 10.7% |
| Nordea | 16.68% |
©2018 Bloomberg L.P.
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