Bank Ratings Incorporate Expectations For ... - Standard & Poor's

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Chart 3 We estimated the average RAC ratio for banks in the EU was 6.8% as of Sept. 30, 2011, versus an average of 7.8% for the rest of the world. This is in line with the results of the quantitative impact study that the Basel Committee on Banking Supervision (BCBS) and the European Banking Authority (EBA) performed at the end of 2010. The studies found that the average common equity Tier 1 (CET1) ratio for 74 of the largest banks in the world (international banks with Tier 1 capital of more than €3 billion) was 5.7%, versus 4.9% for banks in the EU, based on end-year 2009 data and on fully phased-in Basel III requirements. Bank Ratings Incorporate Expectations For Improving Capital Assessments Globally Standard & Poors | RatingsDirect on the Global Credit Portal | February 29, 2012 6 948538 | 300076937
On Dec. 8, 2011, the EBA published a recommendation for European banks to increase their Core Tier 1 ratio to 9% by June 2012, in addition to a buffer to cover mark-to-market losses on sovereign assets. The EBA estimated this so-called "sovereign buffer" to about €40 billion in December 2011, out of a total shortfall of €115 billion. This challenging target led many European banks to plan substantial capital raises and a reduction in RWA. On Feb. 9, 2012, the EBA published a preliminary review of the plans banks submitted to meet this target. The EBA estimates that the total actions banks planned will lead to a surplus that exceeds the regulators' requirements by approximately 26%. Direct capital raising (either through retained earnings, conversion of existing hybrids to Core Tier 1, equity issuance, or issuance of contingent convertible bonds) accounts for about three-quarters of the total actions, while reductions in RWA (deleveraging and internal model revisions) are responsible for the remainder. (See "As Europe's Banks Look To Shore Up Capital, Pressure On Hybrid Debt Grows," published Feb. 13, 2012.) The EBA estimates that internal rating models revisions, which are neutral from a RAC perspective, will represent less than 10% of the total capital building measures. As a result of the total actions banks plan to take, we believe that their RAC ratios will strengthen and that the gap between European banks' ratios and non-EU banks' ratios will narrow. The EBA and BCBS studies ignore the transition period for Basel III that regulators scheduled to end in 2019, with some grandfathering of hybrids up to 2023. For more details on the Basel Committee study, see "Basel's Global Quantitative Impact Study Exposes Large Banks’ Regulatory Capital Shortfall," published Dec. 20, 2010. Our Capital And Earnings Assessments Factor In Global Banks' Expected Capitalization Improvements Generally, we expect that banks globally will continue to strengthen their capital ratios in anticipation of the Basel III capital requirements. We project these banks will continue to retain a significant amount of earnings, reduce RWA, raise capital, or a combination of the three, and our capital and earnings assessments reflect this. In fact, almost one-third of the banks that we have assigned adequate assessments have estimated RAC ratios as of Sept. 30, 2011, of 5%-7% (see table 1). This range would correspond with a moderate assessment if the criteria did not factor in our projections. Table 1 Distribution By Estimated RAC Ratio Ranges (%) Bank Ratings Incorporate Expectations For Improving Capital Assessments Globally Capital and earnings assessment Less than 5% 5%-7% 7%-10% 10%-15% More than 15% Weak 100 0 0 0 0 Moderate 12 77 12 0 0 Adequate 0 30 70 0 0 Strong 0 0 36 55 9 Very strong 0 0 0 0 100 Note: Each line splits the banks with a given capital and earnings assessment by their estimated RAC ranges. Estimated RAC ratios as of Sept. 30, 2011. For example, some banks significantly raised capital since the end of September, which is not reflected in our RAC ratio estimates. Notably, in January 2012, Unicredit completed a €7.5 billion share capital increase, which raises our RAC ratio by about 105 basis points. We expect Unicredit's RAC ratio to approach 7% in the next 18-24 months, reflecting strong balance sheet control. In December 2011, National Bank of Greece completed the issuance of €1 billion preference shares subscribed by the Greek government and realized about €300 million of capital gains from www.standardandpoors.com/ratingsdirect 7 948538 | 300076937
Page 1 and 2: Financial Institutions Research Ban
Page 3 and 4: Our Revised Criteria Clarify The Im
Page 5: Chart 2 The RAC Ratios Vary Highly
Page 9 and 10: computes under the hybrid criteria.
Page 11 and 12: Table 2 Estimated Capital Ratios Fo
Page 13 and 14: atios (see table 3). In other words
Page 15 and 16: Table 3 Historical RAC Ratios Pro F

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