S&P Global Ratings expects risk-adjusted capital (RAC) ratios for the top 100 banks to remain resilient in the next two years, with some variation across countries. Bank capital around the world held up well during COVID-19, demonstrating the effectiveness of Basel rules for capital and strengthening of bank supervision in the past 10 years. Some banks were able to recognize the bulk of the credit losses last year, lessening the need to continue raising provisions, while others will take longer to do so. As such, pressures on earnings will persist on the latter set of banks, but the impact should be gradual allowing them to recognize losses as revenues recover, supporting their capital ratios. In countries, such as Australia, banks have announced the returning of surplus capital, which has been accumulated during the pandemic, through the sale of non-core businesses.
The RAC ratios of the top 100 rated banks remained broadly stable in 2020 compared with 2019, despite the earnings deterioration due to the rise in loan-loss provisions last year. The average RAC ratio was 9.1% in 2020, equal to the one in the prior year. We believe this is mainly due to the following factors:
- Banks desire to maintain prudent capital buffers to contend with the pandemic;
- Lower dividend payouts, given restrictions put in place by regulators during the pandemic;
- The rise of government-guaranteed loans in banks' portfolios, which require less capital; and
- Credit losses will be spread over a longer time frame in some jurisdictions.
The Basel Committee is now focusing on completing what's already been agreed upon. However, we believe uniform implementation of the rules will be difficult to achieve. The decision to delay their implementation by a year to January 2023, due to the pandemic, was fully justified. But the risk of uneven application of the standards is one of several reasons why we believe investors will have to live with partial comparability of regulatory metrics (see "The Basel Capital Compromise For Banks: Better Buffers, Elusive Comparability," published June 3, 2021).
Nevertheless, the consistency of regulatory capital ratios has improved among banks in Basel III jurisdictions. Still, various levels of national discretion and differences in banks' internal models continue to influence regulatory capital ratios. As a result, our RAC ratios remain the cornerstone of our capital analysis in our bank ratings framework. In our view, our RAC ratios continue to provide a more comparable view of bank capital and stronger risk differentiation, particularly in the current operating environment.
Our list of the top 100 global rated banks is based on their regulatory Tier 1 capital. Starting in 2016, the RAC ratios reflect our revised methodology for assessing the capital adequacy of banks.
|S&P's RAC Ratios For The World's Top 100 Rated Banks|
|Rank||Long-term ICR||Group SACP or SACP||Capital and earnings position||Risk position||Combined impact (capital and earnings and risk position)||2020 actual RAC ratio before diversification||2021 forecasted RAC ratio before diversification||2022 forecasted RAC ratio before diversification|
Industrial and Commercial Bank of China Ltd.
China Construction Bank Corp.
Agricultural Bank of China Ltd.
Bank of China Ltd.
JPMorgan Chase & Co.*
Bank of America Corp.*
HSBC Holdings PLC*
Wells Fargo & Co.*
Mitsubishi UFJ Financial Group, Inc.*†
Bank of Communications Co. Ltd.
Credit Agricole Group
China Merchants Bank Co. Ltd.
Postal Savings Bank of China Co. Ltd.
Sumitomo Mitsui Financial Group Inc.*†
Shanghai Pudong Development Bank Co. Ltd.
Banco Santander S.A.
The Goldman Sachs Group Inc.*
Mizuho Financial Group Inc.*†
China CITIC Bank Corp. Ltd.
China Minsheng Banking Corp. Ltd.
Japan Post Bank Co., Ltd.†
China Everbright Bank Co. Ltd.
Intesa Sanpaolo SpA
Credit Mutuel Group
ING Groep N.V.*
Deutsche Bank AG
Banco Bilbao Vizcaya Argentaria S.A.
Credit Suisse Group AG*
UBS Group AG*
Royal Bank of Canada†
Lloyds Banking Group PLC*
Ping An Bank Co. Ltd.
NatWest Group plc*
Cooperatieve Rabobank U.A.
Truist Financial Corp*
Capital One Financial Corp.*
Standard Chartered PLC*
Commonwealth Bank of Australia†
Hua Xia Bank Co. Ltd.
PNC Financial Services Group*
Westpac Banking Corp.†
Bank of Nova Scotia†
Australia and New Zealand Banking Group Ltd.†
National Australia Bank Ltd.†
State Bank of India†
DBS Bank Ltd.
Bank of Montreal†
Korea Development Bank
China Guangfa Bank Co. Ltd.
Development Bank of Japan Inc.†
Nordea Bank Abp
HDFC Bank Ltd.†
Banco Nacional de Desenvolvimento Economico e Social
United Overseas Bank Ltd.
Itau Unibanco Holding S.A.
Danske Bank A/S
ABN AMRO Bank N.V.
Bank of New York Mellon Corp.*
Canadian Imperial Bank of Commerce†
Oversea-Chinese Banking Corp. Ltd.
Nomura Holdings Inc.*†
Banco do Brasil S.A.
Sumitomo Mitsui Trust Holdings*†
Qatar National Bank (Q.P.S.C.)
Erste Group Bank AG
KBC Group N.V.*
KEB Hana Bank
Banco Bradesco S.A.
DNB Bank ASA
Industrial Bank of Korea
Saudi National Bank
VTB Bank JSC
Raiffeisen Schweiz Genossenschaft
First Abu Dhabi Bank¶
ICICI Bank Ltd.†
Federation des caisses Desjardins du Quebec†
American Express Co.*
China Zheshang Bank Co. Ltd.
Skandinaviska Enskilda Banken AB (publ)
Svenska Handelsbanken AB
Nationwide Building Society
La Banque Postale
Resona Bank Ltd.†
Ally Financial Inc.
State Street Corp.*
|Note: The ranking is based on Tier 1 Capital as of December 2020. All RAC ratios are calculated at the group level. The RAC forecasts for Chinese banks incorporate loan-like off B/S wealth management products. *Holding company; the rating reflects that of the main operating company. † RAC ratio for the Indian banks (March 2021), Japanese banks (September 2020), Australian banks (March 2021 except for Commonwealth Bank of Australia and National Australia Bank Ltd, for which we are using the December 2020 and September 2020 data respectively), Canadian banks (October 2020), Nationwide Building Society (RAC ratio as of April 2021). ‡ Estimate. ¶First Abu Dhabi Bank, RAC is based on the merged entity.|
- We expect RAC ratios to remain relatively stable, reflecting a gradual recognition of credit losses globally, except in some regions such as North America and Brazil , where the bulk of credit losses have already been recognized and Australia where banks are returning excess capital. Among European banks, RAC ratios may fall moderately this year, not at least as banks restart distributions to shareholders, but even then RAC ratios may well remain above the end of 2019 levels for many banks.
- As the economic recovery gains momentum, government support is starting to unwind, so far in an orderly manner. Banks remain in a broadly comfortable position to absorb future losses through earnings, rather than capital.
- The RAC ratios for 69 of the top 100 banks have remained stable or shifted less than 5 basis points (bps) as of the end of 2020 compared with 2019. For 18 banks, the RAC improved by more than 5 bps, while the ratio for 13 others has weakened by more than 5 bps.
- The gap between our RAC ratios and regulatory Tier 1 ratios persists, mainly reflecting the various levels of national regulatory discretion, the use of internal models, and the sensitivity of RAC ratios to weaker economies.
S&P's RAC Ratios Continue To Provide Strong Risk Differentiation
Regional differences in the RAC ratios among the world's top 100 rated banks persist (see chart 1). Banks in Switzerland, the Nordic countries, and Australia have the strongest capital ratios; while the weakest ratios among the top 100 banks remain in Brazil, China, and Spain. This is mostly due to these countries' weaker economies, resulting in higher risk weights on domestic banks' assets than those of their peers in the sample. Although Spain's economic growth had been improving until the pandemic-related shock, the country's economy was severely damaged during the 2008 financial crisis and has yet to fully recover from it.
We base the risk weights we apply to banks' exposures on our assessment of each country's economic risk, a component of our Banking Industry Country Risk Assessment (BICRA), and on the risk weights applied to sovereign exposures, which are based on the sovereign ratings. The higher the risk, the higher the risk weights, which result in weaker ratios, while all other credit fundamental remain unchanged. Consequently, changes in our view of a country's economic conditions result in changes in the domestic banks' RAC ratios.
We saw the rise in economic risk in France, Germany, and United Arab Emirates in the past 12 months, which partly explains the erosion in respective banks' 2021 forecasts.
We see significant variations in RAC ratios in some regions, which is why we present a range of minimum and maximum ratios across regions in chart 1. Those among Japanese and North American banks were the widest.
In this article, we include the world's top 100 rated banks ranked based on their regulatory Tier 1 capital. We're mindful, however, that the top 100 banks in this survey--across 26 countries--may not always be fully representative of the jurisdictions where these banks are domiciled, given that other banks in those countries aren't within the top 100, and some banking sectors are more concentrated than others. Within the sample, banks in some regions account for a more significant portion of domestic financial systems' assets than in others.
Some large players also have geographically diversified profiles, and their RAC ratios incorporate wider risk diversity than purely domestic-focused institutions.
We Expect RAC Ratios To Broadly Stabilize After Years Of Buildup
Our survey indicates that the RAC ratios for 69 of the top 100 banks have remained stable or shifted less than 5 bps as of the end of 2020 compared with 2019. For 18 banks, the RAC improved by more than 5 bps, while the ratio for 13 others has weakened by more than 5 bps.
We expect RAC ratios to remain relatively stable for the next two years, because we expect lending growth to be relatively modest over the same period, while provisioning needs moderate from their peak last year, allowing profitability to gradually recover. We expect the economic recovery on the back of unprecedented government support, less need for restrictions to control the virus while the vaccination pace ramps up to help limit the residual risk inflicted by the pandemic on banks' asset quality.
Given the pandemic's harsh economic impact, NPAs could still increase in the coming months in some jurisdictions, particularly in sectors most affected by lockdowns and the changes in customer consumption patterns, but the extraordinary loan-loss provisions that banks raised in 2020 should contain future credit losses.
Nevertheless, we forecast the RAC ratios for Australia's four major banks to be lower in 2022. The lower RAC ratios reflect the Australian major banks returning excess capital to shareholders. Already three of the four major banks have announced buybacks. These buybacks reflect the sale of non-core businesses, a buildup of capital during the pandemic followed by the relaxation of pandemic-related regulatory restrictions, and greater clarity in the Australian Prudential Regulation Authority's new capital framework.
Capital Strength Impact
Similar to what we saw in our previous surveys, the capital strength impact on stand-alone credit profiles (SACPs) of the world's top 100 rated banks ranges from minus 3 notches to plus 2 notches (see chart 3 and refer to appendix for further clarification). The capital strength impact is neutral or positive to the SACPs of 80 banks in our current review, the same trend as in our last survey.
The current distribution of the combined impact remains significantly stronger than six years ago, when only 67 banks had a neutral or positive impact, and reflects the capital buildup among the top 100 banks during that period.
Additionally, we now consider capital adequacy (capital combined with risk position) a ratings strength for 37 of the top 100 banks, up from 35 last year and 21 six years ago. Any expected improvements or deteriorations in RAC ratios are already captured in this combined assessment because we base the capital assessment on our capital projections, rather than actual values, and we have incorporated the expected improvements for the next two years.
Our RAC Ratios Provide Stronger Risk Differentiation Than Regulatory Tier 1 Ratios
Our RAC ratios continue to be typically lower than regulatory Tier 1 ratios, reflecting the various levels of national discretion on regulatory ratios and differences in banks' internal models that still influence regulatory ratios to a large extent. However, some of the features in the Basel III framework, which regulators around the world are currently implementing, help diminish the gap, given that these features were already part of our capital methodology. For example, we've deducted tax loss carry forward and goodwill from our measure of TAC since we introduced our RAC framework in 2010.
We continue to observe the widest difference between the RAC and regulatory ratios for banks in countries whose sovereign ratings and economic risk scores are lower, reflecting the higher charges we apply to their exposures versus regulatory risk weights (see chart 4). That includes the risk weights we apply to sovereign exposures, which we base on our sovereign ratings, versus the risk weights applied by the regulators, which are subject to national discretion and usually very low or nonexistent. The biggest gap between the two metrics remains among banks in Brazil, the U.K., and Italy, as we observed in our previous surveys. The large gap among Brazilian and Italian banks is mainly due to both countries' weaker economic risk score; the higher risk weights we apply to deferred tax assets (DTAs) because of temporary differences from what the regulator applies; and the relatively higher risk weights we apply to the sovereign exposures based on our sovereign rating, while the regulator applies no risk weight. Moreover, Brazil's average Tier 1 capital ratio is relatively high due to BNDES that as of December 2020 had a Tier 1 ratio of 31.2%. Under our RAC methodology, the bank's large equity and investment portfolio in government-owned and private companies have significantly higher risk weights, which weakens BNDES' RAC ratio. In contrast, the gap in some other countries results from the extensive use of internal models. Internal models tend to produce lower risk weights than the standardized approach and what our core RAC assumptions indicate. For example, this is the case for banks in the U.K., France, and the Benelux and Nordic countries that have large gaps, because although their economic risk is stronger, the banks have insurance operations and use internal models.
The gap between our RAC ratio and regulatory ratios is the smallest in Australia. This reflects the domestic regulator's conservative settings in its prudential capital framework and include higher loss given default floors for residential mortgages floors, a more punitive approach towards equity investments, capital requirements for interest rate risk in the banking book, etc.
Appendix: The Capital Strength Impact On Banks' SACPs
To evaluate a bank's capital strength, we primarily look at capital and earnings and the risk position. These two factors are part of the four components of our rating analysis of banks. We assess these factors on a six-point scale: very weak, weak, moderate, adequate, strong, and very strong. The assessment of the risk position incorporates other factors not captured in our RAC ratios, such as differences in underwriting standards across banks and their credit losses.
In general, as long as the banks' anchor SACP--derived from our BICRA methodology--is investment-grade, an adequate assessment is neutral to a bank's SACP. All else being equal, a moderate assessment would lower the SACP by one notch, a weak assessment by two or three notches, and a very weak one by five notches. On the other hand, a strong assessment would raise the SACP by one notch, and the very strong one by two notches.
- Guidance: Applying The Risk-Adjusted Capital Framework Methodology, Sept. 13, 2018
- General: Risk-Adjusted Capital Framework Methodology, July 20, 2017
- Bank Rating Methodology And Assumptions: Additional Loss-Absorbing Capacity, April 27, 2015
- Banks: Rating Methodology And Assumptions, Nov. 9, 2011
- Banks: Banking Industry Country Risk Assessment Methodology And Assumptions, Nov. 9, 2011
- Banking Country Outlook Midyear 2021: Tantalizing Signs Of Stability, July 22, 2021
- Global Banks Outlook Midyear 2021: Clawing Back To Normalcy, July 22, 2021
- Updated Bank Credit Loss Forecasts Show A Little More Clarity, A Little Less Gloom Global, July 15, 2021
- The Basel Capital Compromise For Banks: Better Buffers, Elusive Comparability, June 3, 2021
- Bank Regulatory Buffers Face Their First Usability Test, June 11, 2020
This report does not constitute a rating action.
|Primary Credit Analyst:||Cynthia Cohen Freue, Buenos Aires + 54 11 4891 2161;|
|Secondary Contacts:||Mehdi El mrabet, Paris + 33 14 075 2514;|
|Osman Sattar, FCA, London + 44 20 7176 7198;|
|Gavin J Gunning, Melbourne + 61 3 9631 2092;|
|Nico N DeLange, Sydney + 61 2 9255 9887;|
|Cornelius Cook, New York + 1 (404) 230 3388;|
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