Was this the day bank stocks died?
Sighted in Tuesday’s market – a much bigger Basel III attack than on Monday’s victim, Barclays.
That’s from unconfirmed details of the precise calibrations Basel will bring to bear on banks’ Tier 1 capital and Core Tier 1 capital, as reported by Die Zeit on Tuesday — ahead of an official announcement on Sunday.
Andrew Lim of Matrix sums it up well (emphasis in original):
Minimum Tier 1 ratio of 9.0%, including a “conservation buffer” of 3.0%. This means to us that there will be an absolute minimum Tier 1 ratio of 6.0%, with a capital “conservation buffer” of 3.0% added on top of this. If the bank is within the conservation buffer, then it will be restricted from paying dividends and bonuses in order to organically build capital until the Tier 1 ratio (including buffer) is above 9.0%.
Plus:
Of incrementally negative concern is the possibility that banks will be forced to build up an “anti-cyclical buffer” of 3.0%, (on top of the conservation buffer), so that the minimum Tier 1 capital ratio rises to 12.0% in boom times. In our view this is particularly onerous and has not been anticipated by the market at all. It would, of course, put further pressure on banks to retain earnings, even when they are strongly positive. Only the Nordic banks (DNB NOR, Handelsbanken and Nordea), by our analysis, stand any chance of meeting this very high ratio in the near term.
But it’s when we get to Core Tier 1 that things get interesting/abysmal if you’re a bank investor:
Of more relevance to equity investors is the assertion that there will be a minimum Core Tier 1 ratio of 5.0%, on top of which will be a 2.5% conservation buffer and then a 2.5% anti-cyclical buffer. It seems strange to us that the conservation buffer and anti-cyclical buffer are different to those applied to the Tier 1 ratio. In any case, these ratios are again quite onerous. By our analysis, BBVA, HSBC, Intesa Sanpaolo, Lloyds, Santander, Unicredit and Barclays (i.e. majority of banks that we cover) are at risk of being in the conservation buffer (between 5.0% and 7.5%). This is using ratios as of year-end 2009 though. By 2013, substantial organic capital (and perhaps some reduction of RWA) will have been achieved. However, our analysis shows that BBVA, HSBC, Intesa Sanpaolo, Unicredit and Barclays would still be at risk of being in the conservation buffer (i.e. having a Core Tier 1 ratio below 7.5%) even by year-end 2013.
Few can escape the hand of Basel, in short. That’s because the calibrations would go to the heart of Basel III in defining minimum capital. A previous Basel disclosure on the net stable funding ratio actually recently led bank shares to rally, but only because a huge slew of future funding seemed to taken off banks’ backs. This time the issue is about capital, and it’s looking very specific.
Now, a particular culprit here seems to be Basel’s idea for an anti-cyclical buffer. We weren’t too impressed with this when a proposal about it first came out in July, because its size seemed to be left to the discretion of the authorities in each bank’s country.
Well, not any more.
Related links:
Will Basel III really deliver? – Felix Salmon
Basel III calibration rumour – Deus Ex Macchiato