The capital adequacy of large banks has improved since the global credit crisis, and is expected to continue to improve over the next few years as Basel III capital requirements take effect, says Standard & Poor’s Ratings Services.
S&P estimates that the average risk-adjusted capital ratio for 100 of the largest banks in the world was 7.4% at Sept. 30, 2011, compared with 7% at the end of June 2010 and 6.1% as of June 30, 2009.
“Our opinion of capital position — which combines our assessments of capital and earnings and risk position — is currently less of a negative ratings factor than it was a year ago,” said S&P credit analyst, Elie Heriard Dubreuil, noting that, during the last year, banks have strengthened their capital positions through increased earnings retention, capital raises, and balance sheet reductions.
While these top 100 banks have, on average, increased their RAC ratios by about 40 basis points during the past five quarters, S&P notes that there are significant regional variations. Banks in Latin America, Germany, Asia (excluding China and Japan), Australia, the Nordic countries, and the U.S. exhibited stronger regional averages as of Sept. 30, 2011, it says, whereas banks in the rest of Western Europe, Canada, China, and Japan had generally weaker RAC ratios.
“We have negative outlooks on 27 of these 100 banks, which means the likelihood that we would lower our ratings on these banks is one-in-three. In addition, our ratings on Banco Popular Espanol S.A. are on CreditWatch negative. One of the reasons for these negative assessments is the risk that capital does not strengthen as much as we expect,” said Heriard Dubreuil. “Currently, we expect 25 of these 100 banks, mostly from Europe and the U.S., to increase their RAC ratios such that their capital and earnings assessments would improve by one category on our six-point scale.”