The Lloyds Banking Group PLC (LON: LLOY) share price rose 3.3% after the bank announced that it passed the Bank of England’s (BoE’s) stress test with a significant margin. The bank and seven of its peers were subjected to the BoE’s 2022 annual concurrent scenario stress test (ACS).
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The banking group passed the stress tests with a healthy margin as its transitional CET1 ratio after applying management actions was 11.6 per cent, and its leverage ratio was 4.5 per cent. The BoE had set a minimum passing percentage of 6.6 per cent and 3.5 per cent, respectively.
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The bank also did not have to convert its AT1 securities into equity as it significantly exceeded the capital and leverage hurdle rates. The banking group noted that the 2022 ACS scenario was meant to test the resilience of the UK banking system to deep simultaneous recessions in the UK and global economies.
Lloyds banking group was able to withstand the hypothetical massive declines in asset prices and higher global interest rates. From the outset, the BoE was clear that the scenario testing ensured that the seven largest UK banks could absorb rather than amplify shocks and would continue lending to UK businesses and households.
The BoE test scenarios were more severe than the last global financial crisis as they combined rapidly rising interest rates and unemployment, significant property price declines, and the country’s GDP.
For example, base interest rates surged to 6% in the first year before slowing, falling to 3.5% in the next few years, while inflation soared to 17% and took five years to recover to the BoE’s 2% target. The GDP also fell 5% in the first year, while unemployment peaked at 8.5% in the second year.
Furthermore, UK house prices fell by 31%, and commercial property prices fell by 45% during the first three years. In addition to the economic factors, the stress tests included other risks, such as a traded risk scenario and conduct.
The stress tests were run under the IFRS 9 accounting standard and required the immediate recognition of credit losses.
*This is not investment advice.
Lloyds share price.
The Lloyds share price rose 3.30% to trade at 44.700p, from Tuesday’s closing price of 43.270p.
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