Providence-based RBS Citizens Financial Group’s failure to meet some requirements of the Federal Reserve’s “stress test” for financial institutions has been downplayed by the bank and some analysts who don’t see it significantly impacting the bank’s announced 25 percent initial public offering later this year.
On the other hand, the Financial Times reported on March 27 that of three foreign banks with U.S. subsidiaries that had their capital plans “fall afoul of the U.S. Federal Reserve’s stress test, the failure is likely to be most painful for Royal Bank of Scotland.”
Financial Times writer Martin Arnold said the Fed’s findings of “deficiencies in RBS Citizens’ practices for estimating revenue and losses under a stress scenario and for ensuring the appropriateness of loss estimates across business lines given a specific stress scenario” would likely have a detrimental impact.
“It is almost certain to delay RBS’ plan to file for an initial public offering of Citizens, its U.S. network of 1,400 branches, which it had been expected to do before this summer in order to sell shares in the second half of the year,” Arnold wrote.
RBS Citizens, which has 5,400 Rhode Island employees, in a statement on March 26 clarified that the Fed “objected to certain qualitative aspects” of the company’s capital plan.
“To be clear, we didn’t fail stress tests. We passed stressed tests,” RBS London-based spokesman Erfan Hussain told Providence Business News on April 1.
As for the IPO, that’s on track, said Hussain.
“We have said from the outset that IPO is our favored plan and that will remain the case,” said Hussain.
David O’Connell, a senior analyst for commercial banking at the Aite Group in Boston, said “It’s a big deal if under all the scenarios a bank doesn’t have enough capital. … RBS did have enough capital on hand.” He doesn’t think the stress-test issue by itself would derail the IPO plans.
Robert Cusack, portfolio manager for Providence-based Whalerock Point Partners, agrees.
“The stress-test failure is expected to cause pause by potential buyers, but shouldn’t derail the process completely,” said Cusack.
“With two Japanese banks expressing interest in one week, and the parent acknowledging it would sell at the right price, it appears an auction for Citizens is underway as we speak,” he said. •