Bailed-out UK Banks Hit by New Absolute Capital Rules

Analysts at UBS, which acts as broker to RBS and Lloyds, have cut their share price targets by 10% and 12% respectively.

Their decision was triggered by the Bank of England's demand last week that banks started to look to the stock and bond markets to raise their capital bases. This also has additional implications for Lloyds, according to the UBS analysts, as the bank has been raising hopes it might start to resume dividend payments. UBS reckons this may not now happen until 2014.

"The UK regulatory environment has taken a turn towards becoming more difficult again for the banks. This is perhaps unintentional but we believe no less challenging in the near term," UBS said.

The UBS analysts downgraded their view on Barclays for the same reason, taking their view on all the so-called domestic banks to neutral from buy.

They argue that by focusing on absolute levels of capital rather than the ratio of capital held against loans, the Bank of England's financial policy committee is instigating a "profound change" in its approach.

It has implications for Lloyds and RBS because they have been bolstering their capital ratios since their taxpayer bailouts by reducing their balance sheets. RBS, in particular, has taken £700bn off its balance sheet.

But this does not help with the absolute levels of capital being demanded.

The UBS target for RBS has been cut to 292.5p and for Lloyds to 44p. Taxpayers bought RBS at 500p and Lloyds at 73.6p.

The UBS analysts are not predicting a wave of capital raisings by banks, but say: "The UK banks have not heeded exhortations to raise external equity in our view as they simply do not need it. However, we see a risk that the market will focus the absolute equity level requirement as leading to a risk of new equity issuance, to the detriment of current equity value."

The RBS and Lloyds shares were the biggest fallers in the FTSE 100 by noon – down 2.5% at 260p and 38p respectively – while Barclays was flat.

This article was written by Jill Treanor, for guardian.co.uk on Tuesday 2nd October 2012 13.34 Europe/London

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