Bank stocks rose worldwide as regulators gave firms more time than analysts expected to comply with stiffer capital requirements aimed at preventing future financial crises.
JPMorgan Chase & Co. and Bank of America Corp. led the KBW Bank Index to a 3.3 percent gain at 10:30 a.m. in New York as all 24 companies climbed. France’s Credit Agricole SA and Dexia SA led gains in the Bloomberg Europe Banks and Financial Services Index, which rose 1.9 percent in London to a one-month high. The 224-company MSCI AC Asia Pacific Financials Index rose 1.8 percent, its biggest gain since July 8.
At a meeting in Basel, Switzerland yesterday, regulators reached a compromise that more than doubles capital requirements for the world’s banks, while giving them as long as eight years to comply in full. Germany had sought to give firms a decade to make the transition, while the U.S., U.K. and Switzerland pushed for a maximum of five years.
“Extending these deadlines -- liquidity, buffers, capital definitions -- should be a relief to banks,” said Frederick Cannon, an analyst at KBW Inc. in New York.
Of the 24 U.S. banks represented in the KBW Bank Index, seven, including Bank of America and Citigroup Inc. would fall short of the new ratios based on calculations using the revised definitions of capital, Cannon said in a Sept. 10 report. Sixty- one of the 62 largest U.S. banks would meet the new standards, Richard Bove, an analyst at Rochdale Securities LLC, said in a Bloomberg Television interview. He didn’t identify which one didn’t meet the standards.
Longer Than Expected
“The implementation period is much longer than expected, which is generous to the sector,” Credit Suisse Group AG analysts including Jonathan Pierce wrote in a note to clients today. “The fact that the sector now has a greater degree of certainty about capital requirements going forward ought to act as a material positive catalyst.”
The Basel Committee on Banking Supervision will force lenders to have common equity equal to at least 7 percent of assets, weighted according to their risk, including a 2.5 percent buffer to withstand future stress. Banks that fail to meet the buffer would be unable to pay dividends, though they wouldn’t be forced to raise cash. Lenders will have less than five years to comply with the minimum ratios and until Jan. 1, 2019, to meet the buffer requirements.
“The agreement reached is a very positive step forward which will create a much more resilient banking system in the future while ensuring that banks will be able to maintain lending to the real economy,” U.K. Financial Services Authority Chairman Adair Turner told reporters in Basel. “It’s a very, very balanced package.”
“Nordic banks will be the first to raise dividends, followed by the Swiss,” they wrote. JPMorgan, U.S. Bancorp and Northern Trust Corp. may be among the first U.S. firms to increase their dividends, according to Morgan Stanley.
JPMorgan climbed 4 percent to $41.33 at 9:48 a.m. in New York Stock Exchange composite trading. Bank of America jumped 3.5 percent to $14.03, while Marshall & Ilsley Corp. rose 6.2 perecent to $7.39 and Zions Bancorporation increased 5.7 percent to $20.96.
Credit Agricole rose 6.2 percent to 11.64 euros and Societe Generale gained 5 percent to 46.12 euros. Dexia advanced 6.5 percent to 3.42 euros in Brussels. Deutsche Bank AG rose 2 percent to 48.62 euros and Commerzbank AG, Germany’s second- biggest lender, advanced 3 percent to 6.48 euros.
The cost of insuring bank bonds against default plunged to a five-week low. The Markit iTraxx Financial Index of credit- default swaps on the senior debt of 25 banks and insurers fell 9.5 basis points to 120 as of 1 p.m. in London, the lowest level since Aug. 10, according to JPMorgan.
European banks are less capitalized than U.S. counterparts and may be required to raise more funds under the new Basel rules. Agricultural Bank of Greece, Banco Popolare SC, Credito Valtellinese Scarl and Banca Monte dei Paschi di Siena SpA may fail to meet the 7 percent ratio in 2012, analysts at Goldman Sachs Group Inc. said in a report to clients today.
Eugenio Cicconetti, an analyst at UniCredit Corporate and Investment Banking in London, said Italian banks, which have some of the lowest capital levels among European lenders, will benefit from the extra implementation time. Monte dei Paschi rose 3.2 percent to 1.04 euros and Banco Popolare advanced 4.6 percent to 4.91 euros in Milan trading.
The rule-making process, which began in 2009, has pitted nations against each other. Some, including Germany, said higher capital requirements would hurt their banks and curb lending at a time when global economic recovery is faltering. Germany led the fight for lower ratios and a slower time frame for implementation, according to participants in the talks.
“We have very precisely agreed upon the transition period which will permit that this standard won’t hamper the recovery,” said European Central Bank President Jean-Claude Trichet, speaking on behalf of central bankers from the G-10 nations in Basel today. “It’s good for the global economy, good for growth.”
Germany’s 10 biggest banks, including Frankfurt-based Deutsche Bank and Commerzbank, may need about 105 billion euros ($134 billion) in fresh capital because of new regulations, the Association of German Banks estimated on Sept. 6.
While Germany didn’t get the deadlines extended all the way, it won some concessions for its state-owned banks, which may find it harder to comply. Government capital injections will continue to count as common equity until the end of 2017, even if they were in a form that the new Basel rules consider as not qualifying. State banks get an extra five years of exemptions to rules tightening the definition of capital.
“German banks should have more breathing room,” Citigroup analyst Ronit Ghose said in a note to clients today. “French banks such as Societe Generale and Credit Agricole should now have more time to augment capital adequacy.”
Deutsche Bank, Germany’s biggest lender, is seeking to raise at least 9.8 billion euros in a stock sale. The lender expects to fulfill the Basel requirements no later than the end of 2013, and won’t need fresh capital to meet requlatory standards after its stock sale, Chief Executive Officer Josef Ackermann said today.
Axel Weber, president of the German central bank, who attended yesterday’s meeting in Basel, expressed satisfaction with the outcome. Germany, which had withheld its signature from the committee’s July agreement, signed up for yesterday’s plan.
“The gradual transition phase will allow all banks to fulfill the rising requirements for minimum capital and liquidity,” Weber said in a statement. “The unique characteristics of German financial institutions that aren’t stockholder corporations are thus appropriately catered for.”
Germany’s VOEB association of public sector banks, which represents the country’s state-owned Landesbanken, said today the transition times are “too short” and the new requirements will place a “heavy burden” on German banks.
End to Uncertainty
Other European banks will fare better. Credit Suisse, whose losses from the credit market meltdown were about one-third those of its main Swiss rival UBS AG, said in a statement yesterday that it expected to comply with the new rules “without having to materially change our growth plans or our current capital and dividend policy.”
U.K. banks are unlikely to have difficulties meeting the capital requirements, JPMorgan Cazenove analysts led by Carla Antunes da Silva said in a report.
“We expect the market to respond positively to a more regulatory-certain environment and we would expect investors to focus on capital return for those banks where we see the strongest balance sheets,” the analysts wrote. HSBC Holdings Plc, Europe’s biggest bank, may boost its dividend, they said.
Banks in Asia have high capital ratios and will be able to avoid the degree of fundraising needed elsewhere to meet a new international standard, said Zhu Min, a special adviser to the International Monetary Fund.
“Today if you look at the whole of Asia, Tier 1 capital is more than 10 to 12 percent,” and as a result “I don’t think Asian banks at the moment will go to the markets to raise a lot of capital,” Zhu, a former deputy governor of China’s central bank and vice president of Bank of China Ltd., said on Bloomberg Television from Tianjin.
Commonwealth Bank of Australia, the nation’s biggest lender, rose 1.6 percent after Australia’s Treasurer Wayne Swan said the nation’s banks will “comfortably meet” the new requirements. Mitsubishi UFJ Financial Group Inc., Japan’s biggest lender, led banks higher in Tokyo, rising 2 percent.
The committee also gave banks until the end of 2017 to comply with the tighter definitions of capital and said that a new short-term liquidity standard wouldn’t be implemented until the beginning of 2015. While a separate long-term liquidity rule has been shelved under pressure from the banking industry, the short-term rule was expected to go into effect earlier.
The Association of Financial Markets in Europe, which represents banks on that continent, welcomed the extended transition periods provided to its members for compliance. The group said it still has “significant concerns,” including the possible outcome of the Basel committee’s continuing work on the largest financial institutions.
With yesterday’s decision, the Basel committee has completed most of its work on a package of reforms it will submit to leaders of the Group of 20 nations who are meeting in November in Seoul. The committee has yet to agree on revised calculations of risk-weighted assets, which form the denominator of the capital ratios. The Basel committee has another meeting scheduled for Sept. 21-22 and said it may gather in October to finish its work.