Analysis: New bank rules may hurt big banks, help regionals

NEW YORK Mon Jun 27, 2011 2:57pm EDT

Related Topics

NEW YORK (Reuters) - New regulations announced over the weekend will likely benefit PNC Financial Services Group Inc, US Bancorp and smaller U.S. banks at the expense of bigger competitors including Bank of America Corp and JPMorgan Chase & Co.

International regulators said they will require the biggest banks to use more stock to finance themselves. Smaller banks can borrow relatively more to finance their businesses and enjoy higher returns on equity. That alone could lift their share prices, analysts said.

If relatively lower capital requirements also translated into lower overall funding costs, these banks could be able to make loans at lower rates than bigger competitors, allowing them to win more business.

"If you have to hold less capital than your competitors, you can price your product differently," said Charles Peabody, a veteran banking analyst at Portales Partners in New York.

The favored banks -- which could even include Wells Fargo & Co, the fourth-biggest by assets -- could have a head start toward generating higher returns on shareholders' investments and in paying dividends and buying back stock, analyst Christopher Mutascio of Stifel Nicolaus wrote in a report early Monday, after regulators publicly sketched their plans over the weekend.

The Basel Committee on Banking Supervision agreed on Saturday on how much extra capital to require for the biggest banks globally. The biggest banks are divided into tiers, with those posing the most risk to the financial system being required to have capital ratios that are 2.5 percentage points higher than other banks. That will come on top of the minimum 7 percent risk-based capital requirement for all banks.

The next tier of the biggest banks will be required to have capital ratios that are 2 percentage points higher, and so on down to a 1 percent surcharge for the smallest of the biggest banks. Wells Fargo, US Bancorp and PNC are expected to face surcharges at the lower end of the range. The rules will be phased in from 2016 through the end of 2018.

MOVING PARTS

A lot of the specific rules for these ratios must still be determined, making it difficult to forecast consequences. For example, rulemakers have not yet determined exactly how to estimate the riskiness of assets, a key component in calculating risk-weighted capital.

Adding to the difficulty of making forecasts is that much depends on how risky investors perceive these banks to be. If the biggest banks, like Bank of America, were to be seen as having rock-solid support from the U.S. government, bond investors might lend to them at lower rates than they would to smaller banks.

The savings could help offset the higher equity capital requirements, said Pete Sorrentino, a portfolio manager at Huntington Asset Management in Cincinnati.

"It's hard to make blanket statements about who will win here," Sorrentino said.

And there may be relatively few winners, at least when it comes to share valuations, analysts said.

The Bank for International Settlements on Sunday published its annual report, which said that returns on equity, a measure of bank profitability, will likely halve from pre-crisis levels as banks reduce their risk.

"(I)t is not yet clear that bank managers and shareholders have revised their targeted ROEs accordingly," the report from the world's main forum for central bankers said.

Said Ralph Cole, a portfolio manager at Ferguson Wellman Capital Management who is looking at investing in PNC right now, among other bank stocks: "There are a lot of moving parts in this analysis. The big reason we've stayed out of some of the banks is the unknowns."

But being permitted to fund loans to customers with less equity capital than bigger competitors is likely an advantage, Cole added.

"Lower capital requirements make some of these banks more appealing," Cole said.

(Editing by Gerald E. McCormick)

FILED UNDER:
Comments (0)
This discussion is now closed. We welcome comments on our articles for a limited period after their publication.