Oftentimes, we hear market pundits talk about how important "Tier 1 Capital" is when it comes to evaluating the financial health of a bank. Tier 1 Capital is one of the best gauges of a bank's overall financial health, and, if you are new to investing, your head may start spinning when you encounter many market analysts trying to make Tier 1 Capital sound more complicated than it really is.
Tier 1 Capital simply refers to the components of a bank's balance sheet that can count as "core" or "primary" capital. Generally, Tier 1 Capital consists of the following: equity shares, retained earnings, and preference shares (that are non-redeemable and non-cumulative). The point is this: Tier 1 Capital is supposed to refer to the bank's capital that is permanent and does not contain fixed charges against earnings. For this reason, Tier 1 Capital is considered the bank's capital of the highest quality.
This is why measuring a bank's Tier 1 Capital Ratio, or the percentage of this high quality capital in relation to the bank's risk-weighted assets, often tell investors how well capitalized a bank is. If a bank's Tier 1 Capital Ratio falls, its risk profile changes because it may need to take action to meet minimum Tier 1 Capital requirements (in practice, this often means unpleasant events such as a dividend cut). If a company has trouble meeting its Tier 1 Capital requirements, it may need to issue shares (diluting the existing shareholders) or retain earnings.
When a bank has a high Tier 1 Capital ratio, it may indicate conservative banking practices because a bank could weather an impending storm without needing to raise additional capital. Generally speaking, conservative investors may look for banks with high Tier 1 Capital Ratios because it may signal that the dividend is safe, the bank is healthy, and there is little risk of share dilution going forward (of course, sometimes a bank receives a large capital infusion to bolster Tier 1 Capital, and this may indicate that the company is financially sound now, but is not indicative of sound banking practices in the past).
For this reason, I have compiled a list of the 10 most conservatively capitalized banks that publicly trade in the United States and I have included their Tier 1 Capital Ratios (note: I limited the scope of this list to the 100 largest institutions classified as banks):
1. Bank United (BKU) has a Tier 1 Capital Ratio of 29.27%.
2. Deutsche Bank (DB) has a Tier 1 Capital Ratio of 28.85%.
3. Washington Federal (WAFD) has a Tier 1 Capital Ratio of 24.99%.
4. TFS Financial (TFSL) has a Tier 1 Capital Ratio of 21.54%.
5. CIT Bank (CIT) has a Tier 1 Capital Ratio of 21.46%.
6. Hudson City Savings Bank (HCBK) has a Tier 1 Capital Ratio of 20.39%.
7. Charles Schwab Bank (SCHW) has a Tier 1 Capital Ratio of 20.04%.
8. E*Trade Bank (ETFC) has a Tier 1 Capital Ratio of 19.34%.
9. Goldman Sachs (GS) has a Tier 1 Capital Ratio of 18.88%.
10. International Bancshares (IBOC) has a Tier 1 Capital Ratio of 17.88%.
You can view my source by clicking here.
The average bank, by the way, has a Tier 1 Capital Ratio of 13.1%. The website bankregdata.com is an excellent source that can assist investors curious about the capital information of bank shares they want to purchase. Banks with high Tier 1 Capital Ratios usually pose a small risk of diluting shareholders or cutting dividends going forward, and there is a reason why Tier 1 Capital is the yardstick that regulators use to evaluate a bank's core financial strength. I do not present this list to you as "buy recommendations," but rather, fertile ground for further due diligence for investors who appreciate conservatively capitalized banks.