- We expect the top 200 banks' risk-adjusted capital (RAC) ratios to continue to decrease modestly, by around 5 basis points (bps) over the two years to the end of 2024.
- This reflects a gradual normalization of RAC ratios after a significant rise during the pandemic period. Banks have also resumed shareholder distributions and we believe that they remain in a broadly comfortable position to absorb future losses through earnings rather than capital.
- The gap between our RAC ratios and the regulatory Tier 1 ratios primarily reflects variations in regulatory approaches to measuring capital ratios, banks' use of internal models, and the sensitivity of our RAC ratios to weaker economies.
S&P Global Ratings expects the RAC ratios of the world's top 200 rated banks to decrease slightly, by around 5 bps over the two years to end-2024, continuing the trend from last year. Bank capital around the world proved resilient to the shock of the COVID-19 pandemic, thanks to strengthened supervision and capital requirements from the past decade, as well as unprecedented government support to the private sector. In 2020, regulatory restrictions on shareholder distributions (dividend payouts and share buybacks) led to banks preserving capital, but distributions resumed thereafter. The end of ultra-low interest rates from central banks from 2022 has significantly boosted bank earnings thanks to higher net interest income. Looking ahead, we believe that normalizing credit costs, higher funding costs, and softer loan growth will gradually offset much of this boost. Downside risk to the macroeconomic environment also means downside risk to our RAC projections (see Global Credit Conditions Q3 2023: Higher For Longer Will Fuel Ratings Divergence, published June 29, 2023).
We base our list of the top 200 global rated banks on their regulatory Tier 1 capital (see table 1).
|S&P Global Ratings' RAC ratios for the world's top 200 rated banks|
|Country||Entity Name||Long-term ICR||Group SACP or SACP||Capital & Earnings Position||Risk Position||Combined impact (capital and earnings and risk position)||2022 actual RAC ratio before diversification||2023 forecasted RAC ratio before diversification|
Australia and New Zealand Banking Group Ltd.†
|Commonwealth Bank of Australia†||AA-||a||Strong||Adequate||1||11.60%||11.0%-11.5%|
|Macquarie Bank Ltd.†||A+||a-||Strong||Adequate||1||11.60%||12.0%-12.5%|
|National Australia Bank Ltd.†||AA-||a||Strong||Adequate||1||10.50%||10.0%-10.5%|
|Westpac Banking Corp.†||AA-||a||Strong||Adequate||1||12.20%||11.1%-11.6%|
|Erste Group Bank AG||A+||a||Adequate||Adequate||0||9.39%||9.5%-10.0%|
|Raiffeisen Bank International AG||A-||a-||Adequate||Adequate||0||9.00%||7.75%-8.25%|
|Belfius Bank SA/NV*||A||a-||Strong||Moderate||0||10.90%||10.7%-11.2%|
|KBC Group N.V.§||A+||a||Strong||Adequate||1||10.53%||10.25%-10.75%|
|Banco Bradesco S.A.||BB-||bbb-||Constrained||Adequate||-1||4.70%||4.5%-5.0%|
|Banco BTG Pactual S.A.||BB-||bb||Moderate||Moderate||-1||5.70%||5.5%-6.0%|
|Banco do Brasil S.A||BB-||bbb||Moderate||Adequate||0||6.40%||6.0%-6.5%|
|Banco Nacional de Desenvolvimento Economico e Social||BB-||bbb-||Adequate||Strong||1||8.00%||8.5%-9.0%|
|Banco Santander (Brasil) S.A.||BB-||bbb-||Moderate||Adequate||0||5.00%||4.8%-5.3%|
|Caixa Economica Federal||BB-||bb||Constrained||Moderate||-2||5.20%||4.5%-5.0%|
|Bank of Montreal†||A+||a||Adequate||Strong||1||9.85%||7.5%-8.0%|
|Bank of Nova Scotia (The)†||A+||a||Adequate||Strong||1||7.50%||7.75%-8.25%|
|Canadian Imperial Bank of Commerce†||A+||a||Adequate||Strong||1||9.13%||9.5%-10.0%|
|Federation des caisses Desjardins du Quebec||A+||a||Strong||Adequate||1||14.18%||14.0%-14.5%|
|National Bank of Canada†||A||a-||Adequate||Adequate||0||11.38%||10.5%-11.0%|
|Royal Bank of Canada†||AA-||a+||Adequate||Strong||1||9.96%||8.4%-8.9%|
|Toronto-Dominion Bank (The)†||AA-||a+||Adequate||Strong||1||10.10%||9.2%-9.7%|
|Banco de Chile||A||a||Adequate||Adequate||0||9.60%||9.3%-9.8%|
|Agricultural Bank of China Ltd.||A||bbb+||Adequate||Adequate||0||8.60%||8.0%-8.5%|
|Bank of China Ltd.||A||a-||Adequate||Adequate||0||7.68%||7.0%-7.5%|
|Bank of Chongqing Co. Ltd.||BBB-||bb||Moderate||Moderate||-1||6.20%||5.6%-6.1%|
|Bank of Communications Co. Ltd.||A-||bbb-||Adequate||Adequate||0||7.38%||6.7%-7.2%|
|China Bohai Bank Co. Ltd.||BBB-||bb||Constrained||Adequate||-1||5.00%||4.4%-4.9%|
|China CITIC Bank Corp. Ltd.||BBB+||bb||Constrained||Adequate||-1||5.26%||4.5%-5.0%|
|China Construction Bank Corp.||A||bbb+||Adequate||Adequate||0||7.88%||7.5%-8.0%|
|China Everbright Bank Co. Ltd.||BBB+||bb+||Moderate||Adequate||0||5.85%||5.3%-5.8%|
|China Guangfa Bank Co. Ltd.||BBB-||bb||Moderate||Moderate||-1||5.86%||5.2%-5.7%|
|China Merchants Bank Co. Ltd.||BBB+||bbb||Adequate||Strong||1||7.27%||7.3%-7.8%|
|China Minsheng Banking Corp. Ltd.||BBB-||bb||Constrained||Adequate||-1||5.90%||5.2%-5.7%|
|China Zheshang Bank Co. Ltd.||BBB-||bb||Constrained||Adequate||-1||4.01%||3.9%-4.4%|
|Hua Xia Bank Co. Ltd.||BBB-||bb||Moderate||Moderate||-1||5.62%||5.0%-5.5%|
|Industrial and Commercial Bank of China Ltd.||A||bbb+||Adequate||Adequate||0||8.87%||8.2%-8.7%|
|Ping An Bank Co. Ltd.||BBB+||bb||Constrained||Adequate||-1||5.35%||4.5%-5.0%|
|Postal Savings Bank Of China Co. Ltd.||A||bbb||Adequate||Adequate||0||6.07%||5.3%-5.8%|
|Shanghai Pudong Development Bank Co. Ltd.||BBB||bb||Constrained||Adequate||-1||4.80%||4.4%-4.9%|
|Shanghai Rural Commercial Bank Co. Ltd.||BBB||bb+||Moderate||Adequate||0||6.90%||6.1%-6.6%|
|Bancolombia, S. A. y Companias Subordinadas||BB+||bb+||Constrained||Adequate||-1||4.80%||4.6%-5.1%|
|Danske Bank A/S||A+||a-||Strong||Moderate||0||12.60%||12.5%-13.0%|
|Nykredit Realkredit A/S||A+||a-||Strong||Adequate||1||13.30%||13.5%-14.0%|
|National Bank of Egypt*||B||b||Weak||Moderate||-2||2.10%||1.8%-2.3%|
|Nordea Bank Abp||AA-||a+||Strong||Adequate||1||11.40%||10.5%-11.0%|
|OP Corporate Bank PLC||AA-||a+||Very Strong||Moderate||1||17.08%||18.0%-18.5%|
|Credit Agricole Group||A+||a||Adequate||Strong||1||9.32%||9.5%-10.0%|
|Credit Mutuel Group||A+||a||Strong||Adequate||1||10.36%||10.75%-11.25%|
|Cooperative Banking Sector Germany||A+||a+||Strong||Adequate||1||15.10%||14.15%-14.65%|
|DekaBank Deutsche Girozentrale||A||bbb||Strong||Moderate||0||12.80%||13.35%-13.85%|
|Deutsche Bank AG||A-||bbb||Adequate||Moderate||-1||10.10%||10.0%-10.5%|
|Volkswagen Bank GmbH||BBB+||bbb+||Very Strong||Adequate||2||21.40%||20.25%-20.75%|
|Eurobank Ergasias Services And Holdings S.A.§||BB-||bb-||Constrained||Adequate||-1||5.47%||5.4%-5.9%|
|National Bank of Greece S.A.||BB-||bb-||Constrained||Adequate||-1||6.68%||6.8%-7.3%|
|Bank of East Asia Limited (The)||A-||bbb+||Adequate||Adequate||0||9.60%||9.25%-9.75%|
|OTP Bank PLC||BBB-||bbb||Adequate||Moderate||-1||7.70%||7.35%-7.85%|
|Axis Bank Ltd.†||BBB-||bbb-||Adequate||Adequate||0||8.60%||8.0%-8.5%|
|HDFC Bank Ltd.†||BBB-||a-||Strong||Strong||2||9.80%||10.5%-11.0%|
|ICICI Bank Ltd.†||BBB-||bbb-||Adequate||Adequate||0||10.40%||10.0%-10.5%|
|Kotak Mahindra Bank†||BBB-||bbb-||Strong||Adequate||1||14.30%||14.0%-14.5%|
|State Bank of India†||BBB-||bbb-||Moderate||Adequate||-1||6.30%||6.0%-6.5%|
|Union Bank of India†||BBB-||bb||Moderate||Moderate||-2||5.20%||5.0%-5.5%|
|PT Bank Mandiri (Persero)||BBB-||bbb-||Strong||Moderate||0||10.10%||10.0%-10.5%|
|PT Bank Negara Indonesia (Persero) Tbk.*||BBB-||bbb-||Strong||Moderate||0||12.20%||11.5%-12.0%|
|PT Bank Rakyat Indonesia (Persero) Tbk.*||BBB-||bbb-||Strong||Moderate||0||13.00%||11.0%-11.5%|
|AIB Group PLC§||A||bbb+||Strong||Moderate||0||13.80%||13.3%-13.9%|
|Bank of Ireland Group PLC§||A||bbb+||Strong||Moderate||0||13.67%||13.75%-14.25%|
|Bank Hapoalim B.M.*||A||a-||Strong||Moderate||0||10.20%||10.55%-11.05%|
|Bank Leumi le-Israel B.M.||A||a-||Strong||Moderate||0||9.70%||10.1%-10.6%|
|Israel Discount Bank Ltd.*||BBB+||bbb||Adequate||Moderate||-1||9.04%||9.4%-9.9%|
|Mizrahi Tefahot Bank Ltd.||A-||bbb+||Strong||Moderate||0||10.21%||11.0%-11.5%|
|Iccrea Banca SpA*||BB+||bb+||Adequate||Constrained||-2||7.20%||7.9%-8.4%|
|Intesa Sanpaolo SpA||BBB||BBB||Moderate||Strong||0||6.20%||6.3%-6.8%|
|Chiba Bank Ltd.†||A-||a-||Adequate||Strong||1||8.60%||8.2%-8.7%|
|Development Bank of Japan Inc.†||A||bbb||Strong||Moderate||0||11.22%||10.4%-10.8%|
|Hachijuni Bank Ltd.†||A-||a-||Strong||Adequate||1||11.78%||11.0%-11.5%|
|Japan Post Bank Co. Ltd.†||A||bbb+||Adequate||Moderate||-1||8.50%||7.5%-8.0%|
|Mitsubishi UFJ Financial Group Inc.§†||A||a||Adequate||Adequate||0||6.95%||7.2%-7.7%|
|Mizuho Financial Group Inc.§†||A||a-||Moderate||Adequate||-1||6.27%||6.3%-6.8%|
|Nomura Holdings Inc.§†||A-||bbb||Strong||Moderate||0||13.04%||12.0%-13.0%|
|Resona Bank Ltd.†||A||a-||Adequate||Adequate||0||7.88%||7.9%-8.4%|
|SBI Shinsei Bank Ltd.†||BBB||bbb-||Adequate||Moderate||-1||9.70%||9.0%-9.5%|
|Shinkin Central Bank†||A||bbb+||Strong||Moderate||0||11.40%||11.0%-11.5%|
|Shizuoka Bank Ltd.†||A-||a-||Strong||Adequate||1||10.84%||10.4%-10.9%|
|Sumitomo Mitsui Financial Group Inc.§†||A||a||Adequate||Adequate||0||6.81%||6.9%-7.4%|
|Sumitomo Mitsui Trust Bank Ltd.†||A||a-||Moderate||Strong||0||6.10%||6.3%-6.8%|
|Industrial Bank of Korea||AA-||bbb+||Adequate||Adequate||0||8.47%||8.3%-8.8%|
|KEB Hana Bank||A+||a-||Adequate||Adequate||0||8.12%||8.0%-8.5%|
|National Bank of Kuwait S.A.K.||A||a-||Strong||Adequate||1||10.30%||10.0%-10.5%|
|Banque et Caisse d'Epargne de l'Etat, Luxembourg||AA+||a+||Very Strong||Moderate||1||17.04%||18.75%-19.25%|
|CIMB Bank Bhd.||A-||a-||Adequate||Adequate||0||9.00%||8.5%-9.0%|
|Malayan Banking Bhd.||A-||a-||Adequate||Adequate||0||9.70%||9.0%-9.5%|
|Public Bank Bhd.||A-||a||Strong||Strong||2||10.60%||10.5%-11.0%|
|RHB Bank Bhd.||BBB+||bbb||Adequate||Adequate||0||9.40%||9.0%-9.5%|
|Banco Mercantil del Norte S.A. Institucion de Banca Multiple Grupo Financiero Banorte||BBB||bbb+||Strong||Adequate||1||11.20%||12.0%-12.5%|
|ABN AMRO Bank N.V.||A||bbb+||Strong||Adequate||1||13.30%||13.0%-13.5%|
|Cooperatieve Rabobank U.A.||A+||a||Strong||Adequate||1||11.48%||12.0%-12.5%|
|ING Groep N.V.§||A+||a||Strong||Adequate||1||10.40%||10.0%-10.2%|
|DNB Bank ASA||AA-||a+||Strong||Adequate||1||13.70%||12.5%-13.0%|
|Bank of the Philippine Islands||BBB+||bbb+||Strong||Adequate||1||11.30%||10.5%-11.0%|
|Banco Comercial Portugues S.A.||BB+||bb+||Moderate||Adequate||-1||7.66%||7.8%-8.2%|
|Commercial Bank (P.S.Q.C.) (The)||A-||bbb-||Strong||Moderate||0||11.80%||12.0%-12.5%|
|Qatar National Bank (Q.P.S.C.)||A+||bbb||Adequate||Adequate||0||8.70%||9.1%-9.5%|
|Al Rajhi Bank||A-||a-||Strong||Adequate||1||12.50%||13.3%-13.9%|
|Arab National Bank||A-||bbb||Strong||Moderate||0||12.09%||11.0%-11.5%|
|Banque Saudi Fransi||A-||bbb||Strong||Moderate||0||13.86%||12.85%-13.35%|
|Saudi National Bank||A-||a-||Strong||Adequate||1||12.00%||10.9%-11.4%|
|DBS Bank Ltd.||AA-||a||Adequate||Adequate||0||8.50%||8.5%-9.0%|
|Oversea-Chinese Banking Corp. Ltd.||AA-||a||Adequate||Adequate||0||8.70%||8.5%-9.0%|
|United Overseas Bank Ltd.||AA-||a||Adequate||Adequate||0||8.00%||8.0%-8.5%|
|FirstRand Bank Ltd.†||BB-||bbb-||Moderate||Adequate||0||5.80%||6.0%-6.2%|
|Banco Bilbao Vizcaya Argentaria S.A.||A||a-||Adequate||Strong||1||8.14%||8.6%-8.8%|
|Banco de Sabadell S.A.||BBB||bbb-||Adequate||Adequate||0||7.86%||8.3%-8.7%|
|Banco Santander S.A.*||A+||a||Adequate||Strong||1||7.70%||7.8%-8.2%|
|Skandinaviska Enskilda Banken AB (publ)||A+||a||Strong||Adequate||1||10.30%||10.25%-10.75%|
|Svenska Handelsbanken AB||AA-||a+||Strong||Adequate||1||12.20%||12.8%-13.3%|
|Bank J. Safra Sarasin Ltd||A||a||Very Strong||Adequate||2||37.14%||29.75%-30.25%|
|PostFinance AG||AA||a+||Very Strong||Adequate||2||21.00%||22.45%-22.95%|
|Raiffeisen Schweiz Genossenschaft||AA-||a+||Very Strong||Adequate||2||19.30%||21.65%-22.15%|
|UBS Group AG§||A+||a||Strong||Moderate||0||13.60%||13.55%-14.05%|
|Zuercher Kantonalbank||AAA||aa-||Very Strong||Adequate||2||17.10%||18.45%-18.95%|
|Bank of Taiwan||AA||a-||Strong||Adequate||1||10.55%||10.25%-10.75%|
|Cathay United Bank Co. Ltd.||A||bbb+||Strong||Adequate||1||11.00%||10.0%-10.1%|
|Chang Hwa Commercial Bank Ltd.*||A||bbb+||Strong||Adequate||1||10.72%||10.0%-10.5%|
|CTBC Bank Co. Ltd.||A||a-||Strong||Adequate||1||11.10%||10.5%-11.0%|
|E.SUN Commercial Bank Ltd.||A||bbb+||Strong||Adequate||1||10.45%||10.5%-11.0%|
|First Commercial Bank Ltd.||A||bbb+||Strong||Adequate||1||9.80%||9.9%-10.0%|
|Hua Nan Commercial Bank Ltd.||A||bbb+||Strong||Adequate||1||12.30%||11.5%-12.0%|
|Land Bank of Taiwan||A||bbb||Adequate||Adequate||0||8.38%||8.0%-8.5%|
|Mega International Commercial Bank Co. Ltd.†||A+||a-||Strong||Adequate||1||11.29%||10.0%-10.5%|
|Shanghai Commercial & Savings Bank Ltd. (The)†||BBB+||bbb+||Strong||Adequate||1||12.17%||11.0%-11.5%|
|Taipei Fubon Commercial Bank Co. Ltd.||A||a-||Strong||Adequate||1||10.20%||10.0%-10.5%|
|Taishin International Bank Co. Ltd.||BBB||bbb+||Strong||Adequate||1||11.57%||10.8%-11.5%|
|Taiwan Cooperative Bank Ltd.||A+||bbb+||Strong||Adequate||1||10.55%||10.0%-10.5%|
|Bangkok Bank Public Co. Ltd.*||BBB+||bbb-||Adequate||Adequate||0||7.40%||7.5%-8.0%|
|Krung Thai Bank Public Co. Ltd.*||BBB-||bb||Adequate||Adequate||0||8.30%||8.3%-8.6%|
|Siam Commercial Bank Public Co. Ltd.*||BBB||bb+||Adequate||Adequate||0||7.80%||7.5%-8.0%|
|TMB Bank Public Co. Ltd.*||BBB-||bb||Adequate||Adequate||0||9.20%||9.0%-9.5%|
|United Arab Emirates|
|Abu Dhabi Commercial Bank||A||bbb||Strong||Moderate||0||11.40%||11.5%-12.1%|
|First Abu Dhabi Bank†||AA-||a-||Strong||Strong||2||12.03%||11.5%-12.0%|
|HSBC Holdings PLC§||A+||a||Adequate||Strong||1||9.80%||9.5%-10.0%|
|Lloyds Banking Group PLC§||A+||a-||Adequate||Adequate||0||9.05%||8.5%-9.0%|
|Nationwide Building Society†||A+||a-||Strong||Adequate||1||14.10%||14.5%-15.0%|
|NatWest Group plc§||A+||a-||Adequate||Adequate||0||9.16%||8.75%-9.25%|
|Standard Chartered PLC§||BBB+||A-||Adequate||Adequate||0||8.90%||8.5%-9.0%|
|Ally Financial Inc.||BBB-||bbb||Adequate||Adequate||0||8.87%||8.7%-9.2%|
|American Express Co.§||A-||a-||Adequate||Strong||1||5.55%||5.25%-5.75%|
|Bank of America Corp.§||A+||a||Adequate||Strong||1||10.31%||9.5%-10.0%|
|Bank of New York Mellon Corp.§||AA-||a+||Adequate||Strong||1||10.13%||8.75%-9.25%|
|Capital One Financial Corp.§||BBB+||bbb+||Adequate||Adequate||0||8.35%||8.0%-8.5%|
|Citizens Financial Group, Inc.§||A-||a-||Adequate||Adequate||0||9.24%||9.0%-9.5%|
|Discover Financial Services§||BBB||bbb||Adequate||Adequate||0||8.34%||8.0%-8.5%|
|East West Bancorp Inc.§||BBB+||bbb+||Strong||Adequate||1||11.47%||11.75%-12.25%|
|Fifth Third Bancorp§||BBB+||a-||Adequate||Adequate||0||7.85%||8.0%-8.5%|
|First Citizens BancShares Inc.§||BBB+||bbb+||Adequate||Adequate||0||10.04%||10.0%-10.5%|
|Goldman Sachs Group Inc. (The)§||A+||a-||Adequate||Moderate||-1||10.72%||9.5%-10.0%|
|Huntington Bancshares Inc.§||A-||a-||Adequate||Adequate||0||10.00%||9.75%-10.25%|
|JPMorgan Chase & Co.§||A+||a||Adequate||Adequate||0||8.49%||8.5%-9.0%|
|M&T Bank Corp.§||A-||a-||Adequate||Adequate||0||10.36%||10.0%-10.5%|
|Northern Trust Corp.§||AA-||aa-||Adequate||Adequate||0||8.84%||8.5%-9.0%|
|PNC Financial Services Group, Inc. (The)§||A||a||Adequate||Strong||1||8.21%||8.0%-8.5%|
|Regions Financial Corp.§||A-||a-||Adequate||Adequate||0||8.67%||9.25%-9.75%|
|State Street Corp.§||AA-||a+||Adequate||Strong||1||9.92%||9.50%-10.0%|
|Synovus Financial Corp.||BBB||bbb||Adequate||Adequate||0||9.35%||9.80-10.30%|
|Truist Financial Corp.§||A||a||Adequate||Strong||1||7.10%||8.0%-8.5%|
|Webster Financial Corp.§||BBB+||bbb+||Adequate||Adequate||0||9.98%||9.25%-9.75%|
|Wells Fargo & Co.§||A+||a-||Adequate||Adequate||0||9.00%||8.75%-9.25%|
|Zions BanCorp., N.A.||BBB+||bbb+||Adequate||Adequate||0||8.03%||8.0%-8.5%|
|Note: The ranking is based on Tier 1 Capital as of December 2022. 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. * Estimate. † RAC ratio for the Australian banks (September 2022 except for Commonwealth Bank of Australia and Macquarie Bank Ltd, for which we are using the December 2022 and March 2022 data respectively), Canadian banks (October 2022), Indian banks (March 2023), Mediobanca SpA (RAC ratio as of June 2022), Japanese banks (September 2022 except Chiba Bank and Japan Post Bank Co. Ltd for which we are using March 2023), Riyad Bank (RAC ratio as of March 2023), FirstRand Bank Ltd (RAC ratio as of June 2022), Mega International Commercial Bank (June 2022), Shanghai Commercial & Savings Bank Ltd (June 2022), First Abu Dhabi Bank (March 2023), Nationwide Building Society (April 2023).|
In this article, we include the world's top 200 rated banks ranked by their regulatory Tier 1 capital. We're mindful, however, that the top 200 banks in this survey--spanning 44 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 200, 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 institutions.
We Expect Banks' RAC Ratios To Broadly Normalize After A Boost In 2021
We forecast that the average RAC ratio will continue to slightly decrease, to 9.71% by 2024 from 9.74% in 2022 (see chart 1). After the end of dividend-distribution restrictions in many regions, we expect banks to largely normalize their capital policies compared with those during the height of the pandemic. We continue to see differences among banks due to growth dynamics and varying capital-management policies, in addition to the developments in macroeconomic conditions.
For most of the 200 banks in our sample, our capital measure decreased slightly in 2022
The average RAC ratio decreased by 4 bps to 9.74% in 2022 from 9.78% in 2021. We believe this was mainly due to:
- The resumption of shareholder distributions;
- Broadly stable economic risks, which are a key driver of our risk-weighted asset (RWA) calculations; and
- Higher interest rates largely offsetting normalizing credit costs and rising operating costs, translating to broadly stable profits.
While this small decrease includes positive and negative outliers within the top 200, the median decrease is still modest, at -13 bps. More specifically, at the end of 2022 the RAC ratio for the top 200 banks:
- Remained broadly stable for 18 banks, moving by less than 5 bps;
- Increased by more than 50 bps for 49 banks;
- Increased by between 5 bps and 50 bps for 37 banks;
- Decreased by more than 50 bps for 33 banks; and
- Decreased by between 5 bps and 50 bps for 63 banks.
U.S. Banks: Regulatory Capital Requirements Ahead
We expect many rated banks in the U.S. to build capital to further buttress confidence amid the high-rate, uncertain economic outlook and in anticipation of more stringent capital requirements for large banks. In the second quarter of 2023, most rated banks increased their capital ratios through earnings retention and by limiting or pausing share repurchases. We anticipate further increases in the coming quarters.
The rise in unrealized losses on securities, triggered by interest rate rises over the past 18 months, has exacerbated confidence sensitivity risks in the banking sector and likely contributed to the bank failures that occurred in March and April 2023. Banks are responding to this in part by building capital. Furthermore, U.S. bank regulators have proposed tighter capital requirements for large banks (those with at least $100 billion in assets). The proposals could result in an aggregate 16% increase in common equity Tier 1 capital requirements for the affected bank holding companies, with the increase mainly affecting the largest and most complex banks.
As part of that, the proposed rules would require all large banks to account for unrealized losses and gains in their available-for-sale securities when calculating their regulatory capital (as the global systemically-important banks and the next largest category of banks already do). While regulators would allow a lengthy transition period before the new requirements take full effect, we expect banks to strengthen their capital in anticipation.
Chinese Banks: Adequate Buffers Will Absorb Measured Debt Restructurings
We expect the average RAC ratio to decrease to 6.04% in 2024 from 6.36% in 2022. Loan growth will likely slow to 10.2% in 2024 from 11.6% in 2023, as capital expenditure and economic conditions normalize in China. We project credit costs at around Chinese renminbi (RMB) 2.4 trillion on average from 2023-2025. China's GDP recovery to about 5% per year over this period from 3% in 2022 will likely ease pressure on credit costs and write-offs (as a proportion of average loans).
We note that the Chinese banking sector has sufficient capital to withstand loan stress from property market weakness and regions with constrained resources. We believe the central government is committed to stability and will provide a broadly supportive funding environment that avoids large-scale stress of local government financing vehicles (LGFVs). We therefore expect to see selective and gradual restructuring of LGFV debt.
In a downside scenario, we estimate that LGFVs would account for about 20% of sector loans (including policy banks) and that 60% of LGFV loans would undergo restructuring. Assuming the restructuring results in a 34% pretax loss, commercial banks' capital adequacy ratios could fall by a manageable 2.6 percentage points (ppts). However, smaller banks with concentrated exposures in debt-laden regions will suffer the most. Some of these banks may fail or recapitalize with the government's help if they threaten regional stability.
Japanese Banks: Ready For Basel III Final Rules
We expect the average RAC ratio of banks that we rate to marginally decline (by around 20 bps) to 9.35% in 2024. This is based on our view of stable profit growth, sufficient capital buffers, and a focus on better profitability.
We believe that banks' stable profit growth supports our RAC forecasts. We also think that the higher yen interest rate will benefit Japanese banks' net interest income. At the same time, factors such as increased shareholder returns and steady increases in RWAs as banks focus on more profitable portfolios will partly offset the increase in capital. For the three Japanese mega banks, improving ROE is a high priority in their medium-term strategy.
Japanese banks are required to introduce Basel III final rules in March 2024 for banks under international standards, and in March 2025 for those under domestic standards, respectively. While the impact will vary among banks, we believe that the rated banks have prepared well for the upcoming implementation by building enough capital against the potential increase in regulatory RWAs. The three mega banks estimate that they have already met their CET1 ratio targets, even under full implementation of Basel III final rules.
European Banks: Stable Capital Ratios Ahead
We expect a modest reduction in capital buffers for some European banks, though regulatory and RAC ratios will remain broadly stable for most. Bank profitability rose sharply over the past year and is likely to remain solid even if revenues and credit costs come under more pressure in 2024. Many banks have substantial headroom above management targets. And with balance sheet growth now largely stalled, bank distributions to shareholders have accelerated, although most continue to retain a substantial portion of annual earnings. These factors underpin our forecast for European bank RAC ratios to average around 11.8% in 2024, in line with their level of 11.7% in 2022.
Longer term, Basel III completion continues to move ahead slowly. In the EU, a political compromise was finally reached, and the new rules will come into force from January 2025. The introduction of the output floor will lead to a moderate uptick in required regulatory capital for larger banks, which mostly relied on internal models. That said, several industry and public policy considerations will soften the final impact, at least during a transition period until 2032. We anticipate that EU banks will therefore have substantial time to address any required increase in regulatory capital, either through capital accretion, exposure management, or both. Outside the EU, the U.K. and Switzerland are finalizing their implementation of the Basel III rules, which will likely also come into effect in January 2025. We expect a manageable impact on U.K. banks' capital requirements from these revised rules. In Switzerland, the main driver relates to the introduction of the output floor, which will mainly affect global systemically important bank UBS. We expect the impact to be manageable, however. The Swiss regulator also plans to revise the standardized approaches, and while this will affect all Swiss banks, it has agreed to the principle of capital neutrality for non-systemically important banks.
Capitalization Could Weaken In A More Adverse Scenario
In a recessionary scenario, we believe that RAC ratios could trend lower than we currently forecast in our base-case assumptions. Moreover, under our methodology for measuring RAC ratios, a potential deterioration in sovereign credit ratings and the economic risk score in our Banking Industry Country Risk Assessment (BICRA) would likely translate into higher risk-weights on banks' exposures. Together with rising nonperforming loans (which also carry higher risk weights), this could put upward pressure on banks' RWAs.
That said, we expect that actions from banks to preserve capital in a downturn--such as lowering shareholder distributions and reducing risk appetite--would help mitigate weak or negative capital formation.
Regulatory Metrics Will Remain Only Partly Comparable Due To The Uneven Implementation Of Basel III Rules
The Basel Committee's focus in relation to bank capital rules is on consistent and timely implementation of what has already been agreed. However, we believe that the uniform implementation of Basel III rules will remain difficult to achieve, even as many jurisdictions start to implement the latest rules from next year and the consistency of regulatory metrics continues to improve among banks in Basel III jurisdictions. The risk of uneven application of the rules remains one of several reasons why we believe investors will have to live with the partial comparability of regulatory metrics (see The Basel Capital Compromise For Banks: Better Buffers, Elusive Comparability, published June 3, 2021). Other regulatory priorities around climate risks and digital assets are unlikely to move the dial within our two-year projection horizon.
Our RAC ratios continue to provide greater comparability for bank capital globally
Variations in regulators' application of the rules nationally and in banks' internal models continue to influence regulatory capital ratios. While our RAC methodology makes some simplifying assumptions, in our view, our RAC ratio provides a more comparable view of capital, and a stronger differentiation of risk between banks. This is particularly important in the current more volatile operating environment. Our RAC ratios remain the cornerstone of our capital analysis in our bank ratings framework (see Appendix).
RAC Ratios Still Provide Strong Risk Differentiation Among Banks
Regional differences in the RAC ratios of the world's top 200 rated banks persist
It is unsurprising that banks in countries with lower economic risk tend to have the highest RAC ratios (e.g. Switzerland and the Nordic countries). This primarily results from lower credit losses, stricter underwriting standards, an absence of large economic imbalances, and strong sovereigns that can use their fiscal buffers to support the economy when needed. Banks in Southern Europe, and in emerging market countries where losses tend to be higher, generally have the lowest RAC ratios.
Our RAC ratios are typically lower than regulatory ratios
This reflects the variations in regulatory approaches nationally and differences in banks' internal models that still influence the regulatory ratios to a large extent. However, some of the features in the Basel III framework that regulators around the world are implementing will help diminish the gap, since these features are already part of our capital methodology.
The gap between ratios in some countries results from the extensive use of internal models
Internal models tend to produce lower risk weights than the standardized approach and those our core RAC assumptions indicate. This is the case for banks in the U.K., France, and the Benelux and Nordic countries, for example.
Capital Strength Impact: Neutral Or Positive For Most Banks
The capital strength impact on the stand-alone credit profiles (SACPs) of the world's top 200 rated banks ranges from minus two notches to plus two notches (see chart 4). The impact is neutral or positive for the majority (169) of the top 200 banks. More specifically, the capital strength impact is:
- Neutral to the SACPs of 94 banks;
- A ratings strength for 75 banks; and
- A ratings weakness for 31 banks.
We already capture any improvement or deterioration we expect in the RAC ratios in this combined assessment because we base the capital assessment on our capital projections, rather than on actual values.
When we assess a bank's capital and earnings, we form a forward-looking view on projected ratios based on our view of capital management. Therefore, a temporary decrease in RAC ratios would not automatically affect ratings. But we could see rating pressure for banks whose solvency declines significantly beyond the thresholds set in our criteria, for instance because of insufficient prospects of a recovery in earnings and internal capital generation or because of changes in capital management (with durably lower capital targets).
Appendix: How Our Capital Strength Evaluation Impacts Banks' SACPs
To evaluate banks' potential exposure to losses and their ability to absorb them, we take a combined view of capital and earnings and risk position. These are two components of our rating analysis of banks. We assess both components on a six-point scale: weak, constrained, moderate, adequate, strong, and very strong. The risk position assessment incorporates other factors not captured in our capital and earnings assessment, such as differences in underwriting standards and credit loss experience, the materiality of risks not addressed in the RAC ratio, and the concentration or diversification of a bank's exposures.
- Banking Industry Country Risk Assessment Methodology And Assumptions, Dec. 9, 2021
- Financial Institutions Rating Methodology, Dec. 9, 2021
- General: Risk-Adjusted Capital Framework Methodology, July 20, 2017
- Global Banks Midyear Outlook 2023: Resilience Will Be Tested; July 20, 2023
- Global Banks: Our Credit Loss Forecasts--Rising Losses Amid Growing Risks; July 13, 2023
- 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 Analysts:||Mehdi El mrabet, Paris + 33 14 075 2514;|
|Osman Sattar, FCA, London + 44 20 7176 7198;|
|Secondary Contacts:||Alexandre Birry, Paris + 44 20 7176 7108;|
|Brendan Browne, CFA, New York + 1 (212) 438 7399;|
|Ming Tan, CFA, Singapore + 65 6216 1095;|
|Chizuru Tateno, Tokyo + 81 3 4550 8578;|
|Guilherme Machado, Sao Paulo + 30399700;|
|Research Contributors:||Hanryano Y Lethe Sarungallo, New York (1) 212-438-0464;|
|Simon Geldenhuys, Melbourne +61 3 9631 2173;|
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