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).

Table 1

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.

Chart 1

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.

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.

Chart 2

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.

Chart 3

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).

Chart 4

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.

Related Criteria

• 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

Related Research

• 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