S&P sees bank capitalisation peaking
Despite the likelihood that the Financial Stability Board will call for increases in bank capitalisation levels when it reports to the G20 Leaders in Brisbane next month, and the high probability that the Financial Stability Institute (the BIS) will include similar recommendations in its final report also due next month, Standard & Poor's believes that the capitalisation of the world's major banks has probably peaked.S&P makes the statement in its report "The Top 100 Rated Banks: Will 2014 Mark A Turning Point In Capital Cushioning?", released last week. This seemingly contrary position can be explained in terms of how S&P measures bank capitalisation.S&P relies on its "risk adjusted capital" measure, or RAC, which is a more conservative (and globally consistent) measure than the Basel III tier one capital ratio.S&P states that it expects that tier one capital ratios will increase as regulators mandate higher ratios for G-SIBs and others. However, S&P expects that higher levels of capitalisation will be achieved through increased issuance of additional tier one capital, rather increases in common equity.Additional tier one capital is considered an inferior form of capital, which ultimately will weaken earnings and earnings retention, and could lead to rating downgrades, not upgrades. Coupons must be paid on additional tier one capital while a bank remains adequately capitalised for regulatory purposes, and thereby reduces the capacity of a bank to retain earnings and boost its core capital.In the report, S&P lists the RAC ratios for the 100 largest global banks, as published in The Banker, July 2014. The ratios range from just 2.4 per cent for Allied Irish Banks (rated BB) to 19.5 per cent for Switzerland's Zuercher Kantonalbank (AAA). The RAC ratio for the major Australian banks ranges from 8.3 per cent for NAB to 8.9 per cent for Westpac.With an average RAC ratio of 8.6 per cent, Australia ranks just ahead of the US, with an average of 8.4 per cent, and behind Germany (9.1 per cent), the Nordic countries (also 9.1 per cent) and Switzerland and Austria at 10.6 per cent.To illustrate the conservative nature of the RAC ratio, the average across the 100 largest banks is 7.7 per cent, compared with an average tier one capital ratio of 13.2 per cent.