The taxpayer-backed Lloyds Banking Group suffered at the hands of investors after it emerged as the weakest of the big UK banks in Europe's balance-sheet stress tests.
The City was spooked that Lloyds may not be able to restart paying dividends as soon as it had planned as it might have to keep more money on its books.
Lloyds shares fell 1.71p, or 2.2 per cent, to 75.01p, while Royal Bank of Scotland shares fell 7.1p, or 2 per cent, to 357.1p. Barclays slipped 1.4 per cent and HSBC 1 per cent.
Analysts at Jefferies suggested Lloyds would not be able to pay a “material dividend” until 2016.
Lloyds, which will tomorrow reveal its third-quarter profits and details of another 9,000 job cuts, passed the stress tests of both Mario Draghi’s European Central Bank and the European Banking Authority (EBA), but by the lowest margin of the big four British banks.
In the EBA test, which required banks to have a core equity tier 1 ratio of 5.5 per cent, Lloyds had a ratio of 6.2 per cent, closely followed by RBS with 6.7 per cent. Barclays came out with 7.1 per cent while HSBC was well ahead at 9.3 per cent.
Antonio Horta-Osorio, chief executive of Lloyds, is finalising plans with UK regulators that would allow the bank to pay its first dividend since 2008 in the new year.
But analysts are sceptical. “Lloyds will have a difficult conversation with the regulators when it comes to the timetable and quantum for dividends,” said Sandy Chen of Cenkos Securities.
Analysts at BESI bank said: “The impact of the adverse scenario of the stress test at Lloyds is significantly greater than we had anticipated.”
Jefferies said Lloyds would have to “run with a higher capital ratio than originally thought” and added: “Accordingly, we do not see material dividends until 2016.”
UK banks face another big test on Friday when the Bank of England’s Financial Policy Committee sets out the leverage ratio for banks that it regulates.
This broader measure of bank equity to total loans is expected to be set higher than the global Basel III level of 3 per cent. Analysts are talking of 4 per cent to 5 per cent or even as high as 6 per cent.
In December the Bank will publish the results of its own stress tests, which are tougher than the European ones.
While the tests run in Europe used snapshots (which meant that of the 25 banks that failed, 12 have already raised enough extra capital), the Bank is using the current situation and also factoring in far more stress, with possible outcomes such as house prices falling by 35 per cent and interest rates rising by 4 per cent.