By Matt Scuffham
LONDON (Reuters) - Lloyds Banking Group Plc
Lloyds, along with state-backed rival Royal Bank of Scotland
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
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 their capital, which could include dropping or scaling back their dividends.
Banks will have to show that they would still have a core capital ratio of at least 4.5 percent of risk-weighted assets in stress scenarios including a 35 percent drop in house prices and a rise in interest rates to 6 percent.
Analysts at Citi expect Lloyds to pass the test, holding core capital of 5.7 percent under the stresses, though this would be the weakest result among Britain's biggest four banks.
MODEST PAYOUT
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 financial crisis of 2008 to 2009 and wants to hand shareholders a modest payment.
Analyst Ed Firth at investment bank Macquarie said there was a risk Lloyds might fail the BoE's stress test and didn't expect the bank to be able to pay a dividend until 2015, though he did not see it needing to raise funds.
"Whilst we do not see failure as having capital-raising implications, we no longer expect Lloyds to pay a 2014 dividend," Firth said.
If the regulator blocks Lloyds' dividend plans, it could make it harder for the government to sell off more of its remaining 25 percent shareholding in the bank.
Royal Bank of Scotland
RBS and Lloyds only narrowly passed the European test, holding core capital of 5.7 percent and 6.2 percent against a 5.5 percent pass mark. HSBC
(Editing by David Holmes)