Lloyds dividend plans under threat as Bank of England stress test results due

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Lloyds Banking Group risks rejection of its plans to pay a dividend for 2014 unless it performs strongly in a British test of its financial health, results of which are due to be published next Tuesday.

Lloyds, along with state-backed rival Royal Bank of Scotland, only narrowly passed a test by European regulators in October and now faces a more stringent examination by the Bank of England (BoE).

The BoE is testing how resilient Britain’s biggest eight lenders would be in the face of a slump in house prices and higher interest rates and some analysts believe Lloyds is vulnerable in the test, which adds extra elements on top of those applied by Europe.

Industry sources say the emphasis on home loans in the BoE test means Lloyds, along with mutually owned Nationwide, Britain’s two biggest mortgage providers, will come under pressure. “Lloyds will pass but it won’t be the strongest pass,” one of the sources said.

Lloyds has said it is confident it will pass.

The BoE is expected to order banks which fail or narrowly pass the test to take actions to strengthen capital, which could include dropping or scaling back dividends.

Banks will have to show they would still have a core capital ratio of at least 4.5 per cent of risk-weighted assets in stress scenarios including a 35 per cent drop in house prices and a rise in interest rates to six per cent.

Analysts at Citi expect Lloyds to pass the test, holding core capital of 5.7 per cent under the stresses, though this would be the weakest result among Britain’s biggest four banks.

Lloyds has been in talks with the regulator to start paying dividends for the first time since it was rescued by the Government during the 2008 financial crisis.