Tier 1 Capital Ratios Comparison: U.S. vs. European Banks

On August 20th, the Journal had a piece entitled “At Europe’s Banks, Riskier Tack on Capital” discussing the financial strength of European and U.S. banks.

Banks in continental Europe have strengthened their finances through “strong earnings, benign markets, dividend cuts and some asset sales.” However unlike their British and American peers, they have not increased their capital by issuance of shares. “So far this year, banks on the Continent have raised only $11.6 billion in new equity capital, compared with $48.3 billion in the U.S. and $26 billion in the U.K., according to figures from Dealogic.”

Continental European banks' reluctance to raise new capital easily by issuing shares is good for existing shareholders. Long-term investors hate it when companies dilute their holdings by issuing new shares.

However as the article mentions, in the U.S. most banks don’t give a second-thought of issuing new shares. For example, regional bank BB&T (BBT) issued 33.5 million shares at $26 per share on August 18th raising $837.1 M. Four days before the new offering on August 14th, BB&T bought the failed Colonial Bank of Alabama.

Some other examples of share offerings include:

• Suntrust (STI) - 124.3 million shares at $13.00 per share
• KeyCorp (KEY) - 205.4 million shares at $4.87 per share
• U.S. Bancorp (USB) - 139 million shares at $18 per share

Big banks in the U.S. have raised billions of dollars in these types of new share offerings. One of main reasons cited by these banks to issue shares is to raise their capital levels to bring them to the levels required by the regulators that conducted the stress tests. So in a way, regulators helped banks dilute the holdings of existing shareholders.

Tier 1 Capital Ratios of select US and European Banks:

click to enlarge

Source: The Wall Street Journal

In continental Europe, Swiss-banks UBS (UBS) and Credit Suisse (CS) had strong Tier 1 capital ratios, at 13.2% and 15.5% respectively at the end of June. This is higher than the Tier 1 ratios of US banks like Citibank (C), JP Morgan Chase (JPM) and Bank of America (BAC). To bring up Tier 1 to at least 10%, BNP Paribas (BNPQY.PK), BBVA (BBV) and Banco Santander (STD) and Unicredit (UNCFF.PK) must try to increase their earnings.

Comments

[rdd:]

I find it interesting that a bank that has not taken government money (HSBC) and another that was forced to but may not have needed it (JPM Chase) have relatively low ratios while known basket cases such as Citigroup appear to be doing much better.

Is there something we are not being told about the quality of these ratios?

Aug 24 02:19 PM

[vaultvix:]

One thing I would suggest is that, while important, Tier 1 capital is not the only measure on which to judge the health of a bank. Liquidity, maturity of funding, asset quality, pre-provision profitability...

Aug 24 02:57 PM