Bank Chart Of The Week: Which Banks Have Fortress Balance Sheets?

by: Harvard Winters

Banks are much more aggressively leveraged than industrial companies. A bank with 9% equity/assets (about average for the industry) holds only $0.09 of equity per $1 of assets. It borrows the other $0.91, from depositors and institutions. A 9% decline in the value of the bank's assets would wipe out its equity and render it insolvent.

How different are banks from one another in terms of leverage? The chart below shows tangible equity/tangible assets and risk-based capital ratios at Q2 2013 for the twenty largest US banks by market cap, excluding the trust/processing banks (data is provided by SNL Financial LC):

Investors can easily calculate values for the blue bars using data from 10-Q's (by the way, I use tangible rather than stated equity and assets because intangible assets cannot easily be monetized; a bank can sell a $100 bond if it needs cash but it can't sell $100 of goodwill). The red bars are trickier. Regulators assign risk weights to bank assets and then compare the risk-weighted asset figure to various measures of bank capital, some of which include loan loss reserves. Banks then publicly-disclose these regulatory calculations. The red bars above use the broadest regulatory measure of bank capital. US banking regulators require banks to keep this ratio above 10% in order to be considered "well-capitalized".

What does the chart tell us? Banks generally don't differ all that much in terms of either stated or regulatory capital ratios, and all banks are well in excess of US regulatory guidelines. Hudson City Bancorp (NASDAQ:HCBK), which agreed to sell itself to M&T Bank (NYSE:MTB) last August, is the best-capitalized institution of the group, with 11.4% equity/assets and a 23.78% risk-based capital ratio, versus group averages of 9.25% and 14.89%, respectively.

Take HCBK out of the mix, and stated capital ratios range from 6.67% to 10.93%. JPMorgan Chase (NYSE:JPM) is the lowest, with Bank of America (NYSE:BAC) a distant second at 7.64%. JPM CEO Jamie Dimon has repeatedly referred to his bank's "fortress balance sheet", and now many analysts and journalists do this too. But it just isn't true. JPM has added lots of low-risk assets in an effort to boost ROE. That's why its risk-based capital ratio of 14.12% is only 77 basis points below average, even though its stated capital ratio is 258 basis points below average. But both JPM ratios are below average. If JPM has a fortress balance sheet, so does every other bank in the above chart.

Regulatory capital ratios ex-HCBK range from 12.8% to 16.18%. These are all well above the required 10% mentioned above. People's United Financial's (NASDAQ:PBCT) regulatory capital ratio is the lowest. This is astonishing, given that PBCT completed a second stage conversion to fully-public form in Q2 2007. Post-conversion, its tangible equity/tangible assets ratio was a nosebleed 32%!

Rising interest rates will impact bank capital ratios to varying degrees. But for now, differentiating among banks from a capital standpoint doesn't seem especially fruitful. The largest institutions all appear solid.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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