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

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