Big Banks Need Billions?

According to Bloomberg news that cited a Fitch Ratings’ report, big banks need to raise billions to conform to capital requirements scheduled to be implemented by 2019. These are 29 biggest banks in the world that are referred to as systemically important financial institutions (SIFI) need to raise around $566 billion in total, representing about 23% of these banks’ current total common equity.

Bank of America Corp. ( BAC - Analyst Report ) , Citigroup Inc. ( C - Analyst Report ) , Goldman Sachs Group Inc. ( GS - Analyst Report ) , JPMorgan Chase & Co. ( JPM - Analyst Report ) , Morgan Stanley ( MS - Analyst Report ) and Wells Fargo & Co. ( WFC - Analyst Report ) are a few of the SIFI names in the U.S. Others include the likes of Barclays Plc. ( BCS - Snapshot Report ) , UBS AG ( UBS - Analyst Report ) and HSBC Holdings Plc. ( HBC - Analyst Report ) . These banking big shots are referred to as SIFI as failure of one of them could create a ripple effect and eventually lead to a global financial crisis. Therefore, the new Basel III rules require these banks to raise their capital levels for avoiding such financial meltdown.

According to Fitch, this capital building might limit these banks’ ability to returns shareholder wealth in the form of dividends or share buybacks. Moreover, they could curtail their risky asset holdings. With such a move, weaker companies’ borrowing costs are likely to increase and availability of credit might fall. Finally, they may need to borrow from private equity firms and hedge funds that are less controlled.

It may also create opportunities for some institutions to gain share from peers for having lower funding costs. On the other hand, others may find it appropriate to limit their business and avoid being termed as such institutions so as to avoid regulatory hazards.

Our Take

We believe that the near-term effects of building up capital levels for satisfying regulatory requirements of these banks will have an effect on their profitability, dividends and buybacks as well on the borrowing costs.

Yet, the long-term benefit cannot be denied either as a bank of such stature with weak capital is always a threat. A sturdy capital level of these banks would imply lesser bank failures and subsequently reduce involvement of taxpayers’ money to rescue them. This in turn would help in achieving stability of the financial sector and the economy as a whole.

Notably, to achieve the required capital levels, banks are already cutting their non core businesses, reorganizing their activities, cutting down expenses, boosting their operating leverage and seeking additional sources of cash. Such measures, we believe, would help in an overall improvement in the efficiency level of these banks and act as building blocks of the still unstable world economy.