By Patrick Jenkins in London
Published: November 23 2009 19:23
A study by Standard & Poor’s, one of the world’s leading credit ratings agencies, has raised questions over the financial strength of some of the biggest banks ahead of new rules that could require them to raise more funds.
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The analysis by S&P showed that HSBC is the best capitalised bank in the world, while Switzerland’s UBS, Citigroup of the US and several of Japan’s biggest banks are among the weakest.
The ranking of 45 of the world’s leading banks will unnerve investors, highlighting once again the capital shortfall that institutions still need to make up over the coming years.
Although some banks will be able to top up capital through retained profits, analysts expect a string of rights issues from weaker banking groups as they try to raise tens of billions of dollars.
S&P’s risk-adjusted capital (RAC) ratios – a measure of balance sheet strength – foreshadow the new capital ratio regime expected to be set by the Basel committee on banking supervision early next year.
Its report, published on Monday, gave HSBC a 9.2 per cent ratio, compared with barely 2 per cent for the likes of UBS, Citigroup and Mizuho.
The assessment, which measured banks’ financial strength at the end of June, offered a different picture of banks’ relative strength to that under the current “Basel II” rules on capital adequacy. Under existing rules, UBS had an end-June “tier one” ratio – the standard measure of capital strength – of more than 13 per cent, compared with 10 per cent for HSBC.
The RAC ratio reflects banks’ leverage – asset volumes as a proportion of equity – and factors in greater risk-weightings on assets.
Bernard de Longevialle, who led the analysis, said: “Our study shows that capital for the majority of banks remains a relative weakness.”
Only nine of the 45 banks studied had a ratio above 8 per cent, the minimum level to cover forecast levels of stress.
The S&P ratio strips out national peculiarities, such as regulatory authorisation for high levels of hybrid debt in a bank’s capital make-up, dragging down the ratios of Japanese, German and Swiss banks.
S&P plans to use its RAC ratio as an element of future credit ratings analysis.
Basel II rules are currently being overhauled and are expected to move away from current definitions of “core tier one”, which measures equity strength, and “tier one”, which ranks capital instruments such as hybrid debt virtually on a par with equity. Risk weightings applied to certain assets will also be increased.
Copyright The Financial Times Limited 2009
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