Citigroup Comfortably Leads U.S. Peers In Basel III Readiness

by Trefis Team
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Since the economic downturn of 2008, the primary focus of financial regulatory bodies across the globe has been to ensure that the banks they oversee are made strong enough to weather such unforeseen circumstances in the future. The guidelines laid down as a part of Basel III capital requirement norms form the crux of the rules implemented by these financial watchdogs, albeit with several additions of their own.

Although the world’s biggest banks have argued quite vocally about the adverse effect of the strict regulatory requirements proposed by the Basel Committee, one thing has been made quite clear – the tighter capital limits are here to stay. All that remains to be done about the Basel III norms now is some refinement and the subsequent finalization of the time and manner in which they are to be phased in.

The inevitability of the worldwide adoption of Basel III norms has resulted in banks shoring up their balance sheets in preparation over the recent quarters with increasing regulatory pressure on the banking sector to fall in line no doubt being a major factor responsible for this. The change is evident from marked improvements in Basel III adjusted Tier 1 common capital ratios for the largest U.S. banks. Citigroup (NYSE:C) stand out in particular in this regard with 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 AmericaCitigroupJPMorganWells FargoU.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 five quarters – the period for which data is available for all the banks. Do note that some of the banks revise the Tier I common capital ratios from time to time retrospectively to account for ongoing modifications in the Basel III norms and these figures capture the most recent data available.

Q2 2012 Q3 2012 Q4 2012 Q1 2013 Q2 2013
Citigroup 7.91% 8.64% 8.74% 9.34% 10.03%
Bank of America 7.95% 8.97% 9.25% 9.52% 9.60%
JPMorgan 7.94% 8.38% 8.74% 8.86% 9.33%
U.S. Bancorp 7.87% 8.18% 8.09% 8.22% 8.57%
Wells Fargo 7.78% 8.01% 8.18% 8.39% 8.55%

Citigroup leads the U.S. banking giants with a core Tier I capital ratio figure of above 10% at the end of Q1 2013 – a considerable effort given the fact that the globally diversified banking group has improved the figure by a sharp two percentage points over the period considered. A large part of this improvement comes from Citigroup’s diligent efforts to divest assets housed under Citi Holdings, with the complete sale of its 49% stake in the erstwhile Smith Barney brokerage to Morgan Stanley (NYSE:MS) being the single biggest contributor. Besides, Citigroup’s capital ratios also benefit from the 1-cent-a-share quarterly dividend level it has maintained since the economic downturn. With the bank reporting healthy profit figures over the recent quarters, the retained earnings help boost capital ratios further.

Bank of America comes in at second with the bank too benefiting from low dividend payouts like Citigroup. Improved profitability stemming from its large-scale reorganization plan (dubbed Project New BAC) have also helped the bottom line figures over the recent quarters, which have in turn given the capital ratios a push.

JPMorgan was 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) because of which it faces the highest capital requirements imposed under the Basel III norms. Consequently, the country’s largest bank has had to put its back into improving its Tier 1 capital ratio over the recent quarters, with a nearly 0.5 percentage point improvement in the last quarter alone.

With a much more conservative business model, Wells Fargo and U.S. Bancorp face lower capital ratio requirements compared to their larger peers. This explains the comparatively slower rate at which this banks have been ramping up their Tier I capital ratio over the last year.

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