BofA And Citi Lead In The Race For Basel III Readiness

The world’s biggest banks have been quite vocal about their opposition to stricter regulatory requirements mandated under the Basel III norms over the last few years. But like it or not, tighter capital limits are here to stay and the only things really open to discussion are a few details concerning how and when to impose them – not leaving the banks with much room to push for changes to the rules, which will be phased in over this decade by financial regulators across the globe.

Given the inevitability of the worldwide adoption of Basel III norms, it really makes sense for the banks to begin shoring up their balance sheets in preparation. Some of the banking giants have indeed been quite forthcoming in embracing the changes – demonstrated by a marked improvement in their Basel III adjusted Tier 1 common capital ratios over the last few quarters. Bank of America (NYSE:BAC) and Citigroup (NYSE:C) stand out in particular in this regard boasting of some of the strongest Basel III capital ratios among the global systemically important banks (G-SIBs). In this article, we compare the estimated Basel III ratios for the country’s five biggest commercial banks in the recent past.

See our full analysis for Bank of America | Citigroup | JPMorgan | Wells Fargo | U.S. Bancorp

In the wake of the global economic recession of 2008, financial regulators around the world have been working on tighter rules to ensure sustainability of the banking groups in the event of such circumstances repeating in the future. It can hardly be disputed that the Basel III norms formulated by the Basel Committee on Banking Supervision (BCBS) form the crux of the proposed financial sector reforms. While increasing the common equity and Tier I capital requirements laid out in Basel II, the Basel III norms also tighten the banks’ capital structure by proposing additional capital buffers, a minimum leverage ratio and adding mandatory requirement ratios – the Liquidity Coverage Ratio (LCR) and the Net Stable Funding Ratio (NSFR).

Of all these regulatory capital ratios, the Tier I common capital ratios are most often used as a quick reference to gauge a bank’s capital strength and also to compare them side-by-side. And this is the figure we tabulate below to allow for the comparison of the country’s five biggest commercial banks. The figures below have been taken from the quarterly filings for each of the banks over the last four quarters.

	Q2 2012	Q3 2012	Q4 2012	Q1 2013
Bank of America	7.95%	8.97%	9.25%	9.42%
Citigroup	7.91%	8.64%	8.74%	9.34%
JPMorgan	7.94%	8.38%	8.74%	8.86%
Wells Fargo	7.78%	8.01%	8.18%	8.39%
U.S. Bancorp	7.87%	8.18%	8.09%	8.22%

Bank of America leads the pack with a core Tier I capital ratio figure of 9.42% at the end of Q1 2013. The bank has put in considerable efforts over the recent years to clean up the mess it piled on its balance sheet through the acquisition of Countrywide at the peak of the global economic downturn. The last few quarters have been particularly eventful with the bank completing its exit from correspondent and third-party mortgage businesses to focus on core mortgage banking, and with the organization-wide changes made under Project New BAC beginning to yield results. Thanks to this, Bank of America cut its risk-weighed assets by nearly 12% since June 2012, from about $1.6 trillion to under $1.4 trillion for an improvement of nearly 1.5% in its Tier I ratio over the period.

Citigroup comes in at a close second with the geographically diversified banking group’s continuing efforts to divest businesses housed under Citi Holdings helping it bulk up its Tier I ratio by more than 1.4% since Q2 2012.

It must be mentioned here that both Bank of America and Citigroup also benefited from the 1-cent-a-share quarterly dividend level they have maintained since the economic downturn. With both banks reporting healthy profits over the recent quarters, their retained earnings have grown helping their capital ratios further. The other three banks did not see this benefit, with all of them hiking dividends last year and also initiating share repurchase plans to increase shareholder returns (see The Fed’s Stress Test All-Stars: JPMorgan, Wells Fargo, U.S. Bancorp).

That said, while JPMorgan’s progress in improving its Tier 1 capital ratio is commendable, it may have to put in additional effort over subsequent quarters as it faces the highest capital requirements imposed under the Basel III norms because of being classified as a ‘Bucket 4’ G-SIB by the Basel Committee (refer to The Basel III Challenge For Banks: Why Extra Capital Requirements? for more details).

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