Tier 1 Capital Ratios of Large U.S. Banks

A bank’s Tier 1 Capital Ratio is an indicator of its strength and ability to absorb losses. Regulators in the U.S.A. and other countries are now using this factor in addition to others to identify banks that are likely to collapse.

The Tier 1 capital ratio is the ratio of a bank’s core equity capital to its total risk-weighted assets (Source: Wikipedia). This ratio is considered to be a more reliable measure of financial strength than other numbers that can be calculated to evaluate a bank. In general, the higher the ratio the better the bank. For example, a bank having a Tier 1 ratio of 20% is better than the one with less than 10%. Higher Tier 1 ratio implies that the bank is being run very conservatively.

The following chart shows the Tier 1 Ratios of thirteen large banks in the U.S.A. These numbers were pulled from their first quarter, 2009 earnings report. The Tier1 ratios include TARP funds if a bank accepted it. Hence in some cases the Tier 1 Ratio is higher than it was originally. Some of these banks listed in the chart below repaid billions in TARP funds this week.

Large US Banks Tier 1 Capital Ratios

Chart

Table

Bank Name	Tier 1 Ratio (On March 31,2009)
US Bank	10.90%
BB&T	12.10%
Bank Of America	10.09%
Citibank	11.80%
JPMorgan Chase	11.30%
PNC Bank	10.20%
Suntrust	11.00%
Regions Financial	10.37%
Fifth Third Bank	10.90%
Bank of New York Mellon	13.80%
State Street	19.13%
KeyCorp	11.16%
Wells Fargo	8.28%

Source: Bank 1Q,2009 Earning Reports

State Street (STT) is highly conservative since it has a Tier 1 ratio of 19.13%. Wells Fargo (WFC) on the other hand had the lowest ratio at 8.28%. Despite heavy TARP infusions Bank of America (BAC) and Citibank (C) have Tier 1 ratios of just 10.09% and 11.80% respectively. Other than State Street, Bank of New York Mellon (BK) and BB&T (BBT) have high Tier 1 ratios of above 12%.

Some might argue that the capital ratios of US banks that accepted government funds may not be a good indicator of financial strength since the numbers are inflated. However it is still worth monitoring on a quarterly basis as wild swings in the Tier 1 ratio can be an indicator of other problems.

Comments

[Philip Gvinter:]

Two problems here.

1. The Tier 1 ratio does not include massive off balance sheet liabilities which can account for as much as 75% of some banks' assets.

2. Tier 1 ratios can be (and in my opinion are) manipulated by including intangible assets such as good will as well as retained earnings to boost said ratios.

A much better measure of bank health is tangible common equity. The banks above have very low TCE ratios.

Jun 21 09:47 AM

[arjun:]

Phillip: Tier 1 capital does NOT include goodwill or other intangible items

Jun 21 11:30 AM

[Philip Gvinter:]

Tier 1 is also subject to risk weights assigned to assets. As we are clearly seeing during this credit crisis these weights are oftentimes not appropriately set and these risks are not properly measured. The retained earnings are also subject to manipulation. One easy trick is to use a decline in the market value of a bank's debt as income (Morgan Stanley did this at the beginning of the year)

Jun 21 12:47 PM

[Fitz919:]

Who in their right mind would trust a bank to accurately report a Tier 1 number? It's pure nonsense, it will never happen. Notice how many are clustered around the 10% figure, it's a number they want us all to believe.

If a regulator didn't have a clue that 10.5% of IndyMac's loans were producing no income, then a bank can hide anything they want to from anyone they want to. It was months before B of A knew how bad things really were at Merrill Lynch.

What we have right now is the Government requiring banks to report numbers which they know are false, in order to maintain confidence in their badly broken system.

Jun 21 01:45 PM

[InnocentsAb...:]

Rather, allowing banks to report numbers which they know are false, and thus allowing the pillaging of the public purse.


On Jun 21 01:45 PM Fitz919 wrote:

> Who in their right mind would trust a bank to accurately report a
> Tier 1 number? It's pure nonsense, it will never happen. Notice
> how many are clustered around the 10% figure, it's a number they
> want us all to believe.
>
> If a regulator didn't have a clue that 10.5% of IndyMac's loans were
> producing no income, then a bank can hide anything they want to from
> anyone they want to. It was months before B of A knew how bad things
> really were at Merrill Lynch.
>
> What we have right now is the Government requiring banks to report
> numbers which they know are false, in order to maintain confidence
> in their badly broken system.

Jun 21 03:34 PM

[Free Market...:]

The reason that the banks mostly seem to be clustered around the 10% mark is that it is inefficient to go much higher than that. Generally, it will lessen long-term performance. Like an individual that decides to put all of his investments in risk-frees. It may be safe, but is it better?


On Jun 21 01:45 PM Fitz919 wrote:

> Who in their right mind would trust a bank to accurately report a
> Tier 1 number? It's pure nonsense, it will never happen. Notice how
> many are clustered around the 10% figure, it's a number they want
> us all to believe.
>
> If a regulator didn't have a clue that 10.5% of IndyMac's loans were
> producing no income, then a bank can hide anything they want to from
> anyone they want to. It was months before B of A knew how bad things
> really were at Merrill Lynch.
>
> What we have right now is the Government requiring banks to report
> numbers which they know are false, in order to maintain confidence
> in their badly broken system.

Jun 21 05:43 PM

[Fitz919:]

I'll stand by the word "require", just as the Government required the banks to take the first round of TARP funds (TRAP funds is more like it), and just as Ken Lewis was required to take on Merrill Lynch, when he said he wanted to get out of the deal.


On Jun 21 03:34 PM InnocentsAbroad wrote:

> Rather, allowing banks to report numbers which they know are false,
> and thus allowing the pillaging of the public purse.

Jun 21 06:35 PM

[Voice of co...:]

Is there a bigger joke on investors than the "stress tests" and regulatory capital requirements on the thieving banks?

An absolute insult on one's intelligence. I don't believe the lemmings believe the regulatory bs anymore.

Jun 21 11:35 PM

[Kobe:]

David, did you just cite Wikipedia as your source? LOL.

You are dealing with folks who know how to manipulate the xxx out of financial statements !

Come on man....thats not even a fair fight.

Jun 22 02:10 AM

[rosey99:]

Just out of curiosity, I was wondering if anyone has an idea how the FASB rule changes relating to valuation of encumbered assets might affect the tier 1 capital ratios. I don't remember exactly, and I am too lazy to find out, just when the changes went into effect and if the numbers above reflect the rule change or not.

Anyone?

Jun 22 02:47 AM

[ETF Grind:]

Why is Warren Buffet's bank the one that is most under capitalized?

Jun 22 05:25 AM

[Mark54:]

To be clear stress tests focused on the tangible common equity ratio. This is simply (Tier 1 capital - trust preferred - preferred equity - minority interest) / risk-weighted assets. This often referred to as the Tier 1 Common Ratio. From what I gather the benchmark was 4%. The idea was that institutions with lower TCE ratios had more volatile equity prices and if they had to raise more common it would come at a steep price. SNL calculated the pre-stressed TCE ratios for these banks at:
Bank of America Corporation 4.6%
BB&T Corporation 7.1%
Bank of New York Mellon Corporation 9.5%
Capital One Financial Corporation 9.1%
Citigroup Inc. 2.3%
Fifth Third Bancorp 4.4%
Goldman Sachs Group, Inc. 7.7%
JPMorgan Chase & Co. 6.5%
KeyCorp 5.6%
Morgan Stanley 5.7%
PNC Financial Services Group, Inc. 4.7%
Regions Financial Corporation 6.5%
State Street Corporation 15.5%
SunTrust Banks, Inc. 5.8%
U.S. Bancorp 5.1%
Wells Fargo & Company 3.1%

Jun 25 07:09 AM