Capital remains a relative weakness for the ratings of the majority of the world’s largest banks, according to Standard & Poor’s Ratings Services’ latest global comparison of bank capital strength (see Despite Significant Progress, Capital Is Still A Rating Weakness For Large Global Banks).
The aim of the report is to provide a snapshot of the comparable capital position of the world’s largest banks, based on S&P’s methodology. It compares the capital adequacy levels of 75 of the world’s largest banks, as measured by Standard & Poor’s risk-adjusted capital (RAC) ratio, with the banks’ regulatory Tier 1 ratios, as of mid-2010.
A minority of banks achieved a RAC ratio of 8% both before and after the impact of diversification/concentration adjustment. An RAC ratio of 8% indicates that a bank should have sufficient capital to withstand an ‘A’ or substantial stress scenario in developed markets.
In a related report, Standard & Poor’s also compares the RAC ratios for 56 U.S.-based financial institutions from December 2008 to September 2010 (see U.S. Banks’ Risk-Adjusted Capital Has Improved, But Remains Neutral To Negative For Ratings).
Of the 75 global banks examined, banks in Australia, Singapore, Hong Kong, and the Nordic countries had the highest average RAC ratio, while banks in Japan and Austria had the lowest.
In the U.S., the regional banks are, in our view generally better capitalized than the larger complex institutions, before diversification adjustments. However, with the exception of a limited number of still-struggling or aggressively leveraged regional banks, we consider capital adequacy to be a neutral ratings factor for U.S. regional banks.
RAC ratios are significantly lower on average than Basel I and Basel II Tier 1 ratios, according to the reports. The ratios also highlight that significant disparities in capital strength persist among the world’s largest banks. The rankings for some banks have changed substantially since November 2009, highlighting differences in the speed and aggressiveness of de-risking and recapitalization policies. Several of the banks with the lowest RAC ratios have managed to catch up, at least partially, with the average ratio of the banks.
S&P expects some convergence over time between Basel III ratios and RAC ratios which anticipate several aspects of Basel III.
At the bottom of S&P’s global rankings is Commerzbank, with an RAC of only 3.6 despite a Basel Tier 1 ratio of 10.8. Bank of China tops the rankings with an RAC of 13.4. Some other big banks near the top with an RAC of 9.0 or higher include ING, Standard Chartered Bank, HSBC, Bank of Montreal and Toronto Dominion Bank.
US banks with the lowest RAC of 6.0 or below: Wilmington Trust, Marshall and Ilsley, Capital One, M&T Bank, First BanCorp and First National of Nebraska.