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Largest U.S. Bank Holding Companies Improved Capital Levels Quarter-Over-Quarter Improvement All Three Applicable Capital Ratios

Special SNL Financial Report
By Salman Aleem Khan

The largest U.S. bank holding companies saw improved capital levels in the third quarter when reporting under "advanced approaches" for the second time in quarterly regulatory filings. On a median basis, the eight Fed-approved bank holding companies reported a quarter-over-quarter improvement in all three applicable capital ratios.

Four of the eight institutions reported improved CET1, Tier 1 capital and total risk-based capital ratios when computing capital ratios under the advanced approaches; while six institutions reported an improved Tier 1 capital ratio and total risk-based capital ratio, inclusive of the four aforementioned institutions.

Morgan Stanley reported a CET1 ratio of 14.41% as of Sept. 30, the highest among the pack of eight. The institution also saw the most linked-quarter improvement in all three capital ratios as its CET1, Tier 1 capital and total risk-based ratios improved by 50, 73 and 129 basis points, respectively.

Under the recent changes to the call report's regulatory capital schedule, "advanced approaches" institutions filing the new portion of the schedule are required to compute CET1 capital after making some preliminary and threshold-based adjustments and deductions. Under the preliminary adjustments and deductions, these banks make amendments to goodwill, intangible assets, significant investments in the capital of unconsolidated financial institutions in the form of common stock, and other items. These institutions are then required to make further adjustments depending on whether mortgage servicing assets, certain deferred tax assets or significant investments in the capital of unconsolidated financial institutions exceed 10% of the Tier 1 deduction threshold. Those items subject to the 10% threshold also cannot collectively exceed 15% of CET1 capital at the institution, net of the preliminary adjustments and deductions.

SNL also analyzed all 16 bank holding companies that started reporting the new regulatory capital schedule in 2014, either under the general or the advanced Basel III approaches. While the "advanced approaches" framework makes adjustments to both the numerator and denominator of the computed capital ratios, the general Basel III guidelines only adjust the numerator of the capital ratios based on Basel III rules.

Analyzing the third-quarter filings of the 16 institutions, the group held $943.93 billion in CET1 capital on an aggregate basis. This figure was adjusted by $273.30 billion under the required adjustments and deductions under Basel III, a reduction of 28.95% of the total pre-adjusted CET1 capital.

TD Bank US Holding Co.'s CET1 capital was squeezed by $13.43 billion, or 54.36% of the company's total pre-adjusted CET1 capital under Basel III, representing the highest impact across the group. U.S. Bancorp, a Fed-approved "advanced approaches" institution, saw its pre-adjusted CET1 capital ratio drop by 47.55%, the second-highest percentage after TD Bank US Holding Co.

Bank of America Corp. meanwhile had the highest amount of adjustments and deductions under Basel III in terms of dollar value. The institution reported $70.72 billion in total preliminary and threshold-based deductions - 31.69% of the company's total pre-adjusted CET1 capital.

Under the general Basel III approaches, on a median basis, the group of 16 saw quarter-over-quarter improvements in all four reported capital ratios. The median leverage ratio for the group edged up by 5 basis points, while CET1, Tier 1 and total risk-based capital ratio, improved by 12, 20, and 28 basis points, respectively.

Nine institutions reported higher leverage ratios compared to the past quarter, while 13 reported higher CET1 ratios as of Sept. 30. Twelve institutions reported improved Tier 1 capital and total risk-based ratios in the third quarter.

Note: Starting this year, the regulatory capital schedule within FR Y9-C was broken out into parts I.A and I.B. Part I.A is reported under general risk-based rules, while the new part, I.B, is filled out using Basel III guidelines by "advanced approaches" institutions and any other institution that elects to use the "advanced approaches" for capital computations. An entity is defined as an "advanced approaches" institution under federal regulatory capital rules if it has consolidated total assets of $250 billion or more, has on-balance sheet foreign exposure of $10 billion or more, or is a subsidiary of a depository institution that uses or elects to use the "advanced approaches" to calculate total risk-weighted assets.

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.