RBS and Barclays hit by poor stress test showing

Although RBS' result came in above the 7.5pc threshold, it indicates that some low-quality loans could turn bad quickly in a downturn.

Both banks’ shares fell by 1.6pc.

“For RBS, this puts to bed any dividend hopes for the bank till at least the end of next year and especially pending the Williams & Glyn disposal and all US mortgage settlements,” said analyst Chirantan Barua at Bernstein Research.

The bank has had to delay the spin-off of its Williams & Glyn division, which it was ordered to sell off under the terms of its credit crunch-era bailout.

Meanwhile Barclays could have to raise capital or save up more of its profits – particularly as the Bank of England’s stress tests this autumn are expected to be tougher than those of the EBA.

The bank has already trimmed its dividends, and faces a series of challenges including the full capitalising of its US operations.

“Barclays has already cut its divi, [and] cutting the incremental £400-500m is not really going to help. Also it’s clear that the bank is short on capital – that’s easy for everyone to see,” said Mr Barua.

The stress tests were based on the banks’ capital positions at the end of last year.

Since then Barclays has agreed to sell some of its businesses in Europe, such as its Italian retail bank, though the impact has yet to show up in its finances. The deal should help the bank’s capital position.

It has begun selling down its stake in Barclays Africa, in large part because the stake is a drain on its capital resources. Barclays sold a £640m stake in the African bank in May. Under the terms of that sale it will be free to sell more of its holdings in the coming weeks.

"Investors will want to see these big banks manage to hike their capital ratios to a point where after an adverse test they’re closer to 10pc level," said Julien Jarmoszko at S&P Global Intelligence.

"I am of the view that [to build up that capital] we would see more cost-cutting in their retail banks and probably a delay in paying higher dividends."

Barclays said it is already building more capital.

“Barclays remains comfortable with its target of building the ratio further to maintain a 100-150 basis point common equity tier one (CET1) buffer above future regulatory CET1 levels,” the bank said.

“While the results of the exercise will constitute an input to the 2016 supervisory review process, Barclays’ capital requirements to cover against stress risks will primarily be informed by the Bank of England stress test, which is due to be published later this year.”

Meanwhile RBS said it had performed well.

"The EBA stress test results demonstrate our continued progress towards transforming the balance sheet to being safe and sustainable,” said chief financial officer Ewen Stevenson.

“Over recent years we have materially strengthened our CET1 ratio, substantially reduced our balance sheet and leverage, and continued to de-risk our asset exposures.”

Britain's banking sector was among the worst performing in the stress tests, with the fourth-lowest level of capital in the post-recession scenario.

The Bank of England, however, has said the lenders do not need more capital, and has reduced the countercyclical buffer which banks must hold in good economic times - a move designed to encourage banks to lend more.

RBS is expected to report another loss when it publishes its second quarter financial results this Friday.

Barclays’ profits slid to £2.1bn for the first half of the year as PPI compensation costs climbed again.