Swiss bank UBS has responded to Monday’s report from Standard & Poor’s, which you may recall ranked 45 of the world’s leading banks according to their risk-adjusted capital (RAC) ratios.
By S&P’s reckoning, UBS was near the bottom of the pile, with a RAC ratio of 2.2 per cent. In contrast, S&P gave HSBC a 9.3 per cent ratio, and Goldman 8.3 per cent. Moreover, under S&P’s model, an 8 per cent RAC level “corresponds to full coverage of the level of stress embedded in our ratio.”
The UBS response to S&Ps report was short, sharp and to the point:
S&P report not reflective of UBS’s capital position: Pro forma risk-adjusted capital ratio at 7.1% (when taking into account mandatory convertible notes)
Zurich/Basle, 24 November 2009 — The report issued by Standard & Poor’s (S&P) is not representative of UBS’s capital position in relation to its peers.
The bank’s risk-adjusted capital ratio (RAC) is estimated to be 7.1%, and not the 2.2% reported by S&P. Their report shows a RAC as of 30 June 2009 which does not take into account two important components of UBS’s capital:
• the CHF 6 billion mandatory convertible notes (MCNs) fully converted in August 2009
• the CHF 13 billion MCNs due to convert by March 2010.
For what it is worth, some analysts are siding with the Swiss.
Here’s Nomura’s Jon Peace:
The reason UBS is so low is primarily because S&P doesn’t count the SFR 6bn (already converted) and SFR 13bn of mandatory convertibles (converting March 2010) as equity which the market and regulators rightly do, although it does also apply a much higher charge for IB operations than regulators. On conversion the ratio would rise to at least 5.0% for UBS, rather closer to investment banking peers.
Over time, as Basel II rules are tightened we would expect to see a convergence between the Basel II Tier 1 and the RAC ratios. Although perhaps overzealous treatment of certain instruments (mandatory convertibles) and a mechanical calculation (underwriting standards) mean that headline figures need to be carefully understood (as S&P will do when considering its rating), we do see the RAC ratio as a useful third-party check, benefiting as it does from confidential information, of the underlying capital strength of various banks.
On the other hand, here’s BNP Paribas on Monday, in a note released shortly after the S&P report was republished:
UBS’s case is particularly interesting as it has a 13.2% Tier 1 ratio under Basel II but only a 2.2% RAC ratio. The differences in numerator between RAC and Basel II is primarily a lower acceptance of hybrid capital in RAC. Other differences include treatment of pension deficits, revaluation reserves and intangibles. In UBS’s case, the difference was mainly due to hybrid treatment. S&P also apply a higher capital charge for market risk, insurance risk, and credit risk, e.g. the trading book RWAs will be already higher than Basel II RWAs (ahead of the changes). Even when Basel II implements the new trading book regime in 2011, S&P expects their own capital charge to remain about 1.5x higher than Basel II’s. S&P also allocate a one-for-one charge to the capital invested in banks’ subsidiaries.
Over to you S&P: will you amend the report or not?
Related links:
S&P raises fears over health of some banks – FT
How the Basel II capital cliff begets resecuritisation – FT Alphaville
Leverage ratios are the new VaR? – FT Alphaville