Lloyds Gets Capital Relief From Bank of England Risk Change

(Bloomberg) -- Lloyds Banking Group Plc has been given more breathing space on its capital requirements, paving the way for higher shareholder payouts this year.

The change, stemming from a revision by the Bank of England’s Prudential Regulation Authority, would allow the bank to lower its targets for its CET1 ratio, a measure of capital strength, to around 12.5 percent, from 13 percent, according to a statement on Wednesday. That could free up about 1 billion pounds ($1.3 billion) in excess capital for the lender, according to analysts.

Britain’s largest mortgage lender signaled it’s mulling share buybacks and dividends as a result of the move. Lloyds’ shares rose 1.7 percent to 63.6 pence at 8:56 a.m. in London trading.

“The group has a progressive and sustainable ordinary dividend policy and the board will continue to give consideration to the distribution of surplus capital at the end of the year,” the bank said.

Jefferies Group LLC analysts Joseph Dickerson and Aqil Taiyeb said the BOE cut its requirements more than the market expected, leaving Lloyds with about 1 billion pounds of excess capital that could be used for a buyback this year.

“This is the first example we can think of where one of the large quoted U.K. banks has actually reduced its capital requirement, after a number of years of upward revisions,” said Shore Capital Group Limited analyst Gary Greenwood in a note.

The PRA also said Wednesday that Royal Bank of Scotland Group Plc’s systemic risk buffer rate would be 1.5 percent, while Barclays Plc, HSBC Holdings Plc and Banco Santander SA’s U.K. unit would be 1 percent. The rates apply from Aug. 1.

Lloyds is due to publish its first-quarter results on Thursday.

The review comes days after Deutsche Bank highlighted an improving picture for its capital requirements, as a result of changes to the way the Financial Stability Board judges its importance in the global banking system.

What Bloomberg Intelligence Says

“This will release about 1 billion pounds more for distribution to shareholders, and also signals the regulator’s growing comfort with the outlook for the bank and Brexit.”
--Jonathan Tyce and Georgi Gunchev - banks analysts

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