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

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the buyback of debt instruments. We estimate that the two measures together would enhance the bank RAC's ratio by about 65 basis points. In addition, as of Jan. 31, 2012, Zuercher Kantonalbank successfully completed the issuance of Swiss franc (CHF) 590 million in Tier 1 subordinated debt, which we include in our TAC, and which we believe would likely enhance the bank's RAC ratio by about 100 basis points. Another bank that has substantially increased capital since September 2011 is Santander. Based on the bank's reported figures as of year-end 2011, we believe that its RAC ratio should have improved by at least 50 basis points in fourth-quarter 2011. The bank took several initiatives in the fourth quarter to comply with the EBA's core capital requirements in advance of the June 2012 deadline. Some of those, in particular the extension of the scrip dividend program and a reduction in the amount of goodwill and other intangibles, should have a positive impact on our year-end 2011 RAC. However, other measures aimed at converting Tier 1 instruments into core capital were neutral to our RAC because we already gave full credit in our RAC to the hybrids subject to the exchange. In addition, UBS substantially deleveraged market risk exposures in the fourth quarter of 2011. On a pro forma basis, we estimate that the RAC ratio was close to or within the 7%-8% range at year-end 2011. Bank of America (BofA) also increased its RAC ratio meaningfully during the fourth quarter as a result of a number of significant capital actions. We estimate that the RAC ratio should have improved by about 90 basis points. Actions taken during the quarter included an exchange of preferred and trust preferred securities for common stock and senior notes. The company also sold its investment in China Construction Bank (CCB). Also during the quarter, BofA reduced its RWA by a reported $75 billion through the sale of noncore assets and other management actions. In 2012, KBC finalized the signed agreements to sell Warta, KBL, and Fidea, which we believe will increase KBC's RAC ratio by about 50 basis points. Another example of a bank with a RAC ratio currently lower than its capital and earnings assessment would imply is VTB Bank. VTB's RAC ratio dropped to an estimated 3.8% as of Sept. 30, 2011, from 6.9% at year-end 2010 because of the bank's third-quarter 2011 purchase of Bank of Moscow (BOM) under fair value accounting. The acquisition increased VTB's risk-weighted assets and reduced its tangible equity because of an increase in goodwill. Just prior to the purchase, the Russian government took the troubled BOM under administration and injected $5 billion, increasing BOM's loss reserves to approximately 50% of loans. VTB Bank purchased the BOM loans net of reserves at 50% of prior book value. We believe that the acquisition at a deep discount limits the risk of further losses on the BOM portfolio. We did not adjust VTB's pro forma RAC ratio as of Sept. 30, 2011, for this. On the other hand, a few banks have capital and earnings assessments that are lower than what their estimated September 2011 RAC ratios would suggest. One of the reasons for this is that our estimates reflect benefits to the RAC ratio that are temporary and, therefore, not considered in our projections. (For example, Banca MPS' RAC ratio includes Tremonti bonds--hybrid capital subscribed by the Italian government--that we believe should be reimbursed before year-end 2013.) Another reason is that we believe some of these banks' RAC ratios could deteriorate based on our expectation for rapid growth. Bank Ratings Incorporate Expectations For Improving Capital Assessments Globally Estimated RAC Ratios As Of Sept. 30, 2011 We made our most recent estimates of RAC ratios at the end of third-quarter 2011, which is Sept. 30 for most banks (see table 2). Exceptions include Canadian banks, for which it is Oct. 31. The estimated RAC ratios reflect the sovereign ratings and the banking industry country risk assessments (BICRA), including the economic and industry risk scores, as of Feb. 28, 2012. The numerator of the estimated RAC ratio is TAC, which Standard & Poor's Standard & Poors | RatingsDirect on the Global Credit Portal | February 29, 2012 8 948538 | 300076937
computes under the hybrid criteria. As for the denominator (RAC RWA), whenever comprehensive disclosures were not available to precisely compute the RAC RWA, we assessed the growth rate (or decline) in regulatory RWA between the date of calculation with full disclosure (such as December 2010) and Sept. 30, 2011, and applied the same growth rate (or decline) to our RAC RWA. (See the appendix for details on our assumptions for U.S. banks.) To make table 2 more comparable, the long-term issuer rating refers to the main operating banks within a particular group. Holding companies are typically rated one notch lower than operating banks in a group to reflect the structural subordination of their creditors. Overall, we observe a strengthening trend in capital for the 100 largest banks globally, and our ratings on about one-third of these banks reflect our expectation that their RAC ratios will step up a level. Any failure to improve could result in downgrades. Table 2 Estimated Capital Ratios For 100 Of The Largest Banks Country Entity name Australia Australia and New Zealand Banking Group Ltd. Australia Commonwealth Bank of Australia‡ Long-term issuer credit rating Outlook Estimated RAC ratio before diversification as of Sept. 30, 2011 (%) Capital and earnings assessment Risk position assessment Combined impact of capital and earnings and risk position assessments (number of notches) AA- Stable 8.5 Adequate Adequate 0 AA- Stable 7.5 Adequate Adequate 0 Australia Macquarie Group Ltd.¶§ A Stable 8.9 Adequate Moderate (1) Australia National Australia Bank Ltd. AA- Stable 7.8 Adequate Adequate 0 Australia Westpac Banking Corp. AA- Stable 8.0 Adequate Adequate 0 Austria Erste Group Bank AG A Negative 5.7 Moderate Adequate (1) Austria Raiffeisen Banking Group Austria¶† A Negative 5.1 Moderate Adequate (1) Belgium KBC Group N.V.¶ A- Stable 4.5 Moderate Adequate (1) Brazil Banco Bradesco S.A. BBB Stable 5.9 Moderate Adequate (1) Brazil Banco do Brasil S.A BBB Stable 6.5 Adequate Adequate 0 Brazil Banco Nacional de Desenvolvimento Economico e Social BBB Stable 12.6 Strong Adequate 1 Brazil Banco Santander (Brasil) S.A. BBB Stable 9.7 Adequate Adequate 0 Brazil Itau Unibanco Holding S.A.¶ BBB Stable 5.5 Moderate Adequate (1) Canada Bank of Montreal A+ Stable 6.8 Adequate Adequate 0 Canada Canadian Imperial Bank of Commerce A+ Stable 7.4 Adequate Adequate 0 Canada Royal Bank of Canada AA- Stable 6.7 Moderate Strong 0 Canada The Bank of Nova Scotia AA- Stable 6.4 Adequate Strong 1 Canada Toronto-Dominion Bank AA- Stable 7.7 Adequate Adequate 0 China Bank of China Ltd.* A Stable 6.6 Moderate Moderate (2) China Bank of Communications Co. Ltd.* Bank Ratings Incorporate Expectations For Improving Capital Assessments Globally A- Stable 6.0 Moderate Adequate (1) www.standardandpoors.com/ratingsdirect 9 948538 | 300076937
Page 1 and 2: Financial Institutions Research Ban
Page 3 and 4: Our Revised Criteria Clarify The Im
Page 5 and 6: Chart 2 The RAC Ratios Vary Highly
Page 7: On Dec. 8, 2011, the EBA published
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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