A Look At How The Largest U.S. Banks Have Strengthened Their Core Capital Ratios Since 2012

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As regulatory requirements turned stricter in the wake of the economic downturn, the largest U.S. banks worked diligently to improve their common equity tier 1 (CET1) capital ratio figures. Since late 2012 (when the banks began disclosing fully phased-in CET1 estimates), Morgan Stanley has grown its CET1 ratio by an average of ~130 basis points (1.3% point) each year, while progress for Bank of America has been much slower at 30 basis points (0.3% point) each year.

CET1_QA_US_Change_FY16

Details about the regulatory CET1 targets for each of these banks, and their capital buffers, can be found here.

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U.S. banking giants have put in a considerable amount of effort over recent years to prioritize Basel III compliance – on several occasions shrinking profitable operating units to clean up their balance sheets. Investors in the banking sector also felt the impact of the tighter regulatory oversight, as dividend payouts and share repurchases from the banks remained low for years after the economic downturn. But as overall economic conditions improved, and as the banks made sizable progress towards achieving their capital requirement goals, dividends and share repurchases have jumped higher over recent years. Notably, JPMorgan handed out more cash to investors through dividends and share buyback plans in 2016 than it has ever done in the past, and some other banks (especially Morgan Stanley) are also expected to reach a similar position of strength over coming years.

Morgan Stanley has the distinction of being the best capitalized major banking giant in the world, with the bank reporting a CET1 figure of just under 16% at the end of 2016. Morgan Stanley’s CET1 ratio has benefited over the years from its decision to remain stingy with returning cash to shareholders – instead focusing on acquiring 100% of Smith Barney from Citigroup. The bank’s long-term strategy of cutting down on the capital-intensive fixed income trading business has also helped reduce the size of its risk-weighed assets (RWA), which in turn has given the CET1 figure a boost. In fact, Morgan Stanley’s efforts to shrink its balance sheet also led to its capital requirements being reduced by the Basel committee as a part of its 2016 annual review of global financial giants (see New FSB List Increases Capital Target For Citigroup, BofA; Requirements Reduced For HSBC, Barclays and Morgan Stanley).

The huge difference between Morgan Stanley’s current CET1 ratio and its 2019 regulatory target of 10% gives the bank considerable leeway in handing out cash to investors in the form of share repurchases and dividend hikes – something that we believe will result in a sizable jump in payouts this year. We represent dividend payouts and share repurchases in our analysis of Morgan Stanley in the form of an adjusted dividend payout rate, as shown in the chart below. You can understand how a change in Morgan Stanley’s adjusted payout ratio affects its share value by making changes here.

See full Trefis analysis for U.S. Bancorp | Wells Fargo | Goldman SachsJPMorganMorgan StanleyBank of America | Citigroup

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