Asian banks' drive to shore up core capital brings little cheer

How much capital does an Asian bank need these days? A lot more than most people - including investors - might think. The global regulatory drive to shore up core equity at banks is stabilising lenders and reducing the chances of public bailouts in the event of a financial crisis. But it is also dragging on performance and in some cases, changing the way investors view financial institutions. In Asia, where many regulators have set the bar for capital adequacy above the international norm, the efforts have led to what some experts called "capital hoarding" as banks rush to issue equity or sell off significant businesses to shore up their balance sheets. "What you're seeing now is unprecedented," said Ismael Pili, the head of financials research at Macquarie. "We find that Asian banks will hold more capital than expected, and that's not necessarily good for shareholders." Banks in Asia raised US$106 billion in tier-1 and 2 capital last year, up from US$4 billion in 2013, according to data from Dealogic. That is capital that complies with the standards of the Basel Committee on Banking Supervision, the driving force in the effort to raise core capital levels across the global banking industry. But it is not the only force. It simply recommends a flat core equity ratio for regulators around the world to adopt. Regulators in Asia have done just that - and raised the levels, too. With other incoming capital requirements, such as a counter-cyclical buffer and addition capital needs for banks deemed "systemically important", banks are going on a capital-raising spree. That is especially true among some of the biggest institutions in the region, the Chinese banks. In the last quarter of last year, Chinese banks alone issued more than US$25 billion in preferred shares, a hybrid which count as tier-1 capital, about 90 per cent of global issuance during that period, according to Fitch Ratings. In the first half of this year, Fitch estimates mainland banks will issue up to US$50 billion more in such shares. Consider the requirements stacking up against China's asset-heavy banks. While Basel recommends a 7 per cent core tier-1 equity ratio, mainland regulators have boosted that to 11.5 per cent for big banks by January 2019. Hong Kong will impose a 13 per cent requirement. The Philippines will lead the region at 15 per cent. This has not just pushed the banks to issue new shares. It is also driving a regional sell-off of assets to raise equity. In one of many recent disposals, Hang Seng Bank sold half of its stake in the mainland's Industrial Bank, aiming in part at boosting its core equity standing. In the wake of the global financial crisis and a looming economic slowdown in China, the capital drive was not surprising, said Phillip Straley, the head of risk and regulation at PwC Consulting. "This is all to be expected given the external environment - that is, the regulatory environment and rising risk," Straley said. "Financial institutions already know they need to price higher to consumers and cut costs." When a bank dramatically boosts its equity, the return on that equity will fall. Standard Chartered and HSBC Holdings have watched returns on equity fall recently as they strengthened their regulatory capital. As a sign of the times, both banks have announced they will seek to chin above a low 10 per cent return on equity within the next few years. Also, banks will need to shrink their loan books in order to retain higher capital levels. In other words, they will need to slow down what most banks consider their bread-and-butter business of lending. Investors are not smiling on the new rules. As banks issue new shares, existing shares are diluted, lowering their value. In many countries, banks are cutting dividends with the hope of retaining capital. In Hong Kong, dividends have fallen by more than half since 2008, according to Macquarie. Customers, on the other hand, will make up some of the difference in the fees they pay to banks. "Building up on the fee business could be one way to improve on returns on equity while not sacrificing on your capital ratios," said Benjamin Ong, an analyst at Phillip Securities in Singapore. What does it mean for banks in the long run? Slower growth, lower returns and unhappy investors are highly likely, not just in Asia but globally. "The-worst case scenario is that banks are treated like utilities by investors - predictable cash stream but no growth," Pili said.

Asian banks' drive to shore up core capital brings little cheer

.css-1c6uqr6{color:inherit;font-weight:inherit;font-size:inherit;font-family:inherit;line-height:inherit;overflow-wrap:break-word;}Banks' rush to hoard cash to meet Basel rules dragging down their performances and lowering the value of shareholders' investments

Banks' rush to hoard cash to meet Basel rules dragging down their performances and lowering the value of shareholders' investments