Financial Regulatory Forum

ANALYSIS-Japan banks to bear brunt of new capital rules in Asia

October 2, 2009

A woman walks past a Nomura Securities branch in Tokyo September 25, 2009. Japan's Nikkei stock average slid 2.6 percent on Friday, as financial shares were hit hard after Nomura Holdings said it plans to issue up to $5.6 billion in shares, raising concerns other banks could follow suit.  REUTERS/Toru Hanai (JAPAN BUSINESS)   By David Dolan
   TOKYO, Oct 2 (Reuters) – After raising $54 billion of equity this year to ride out the financial crisis, banks in Asia are likely to tap markets for billions more as the G20 moves towards tightening capital requirements for global lenders.
   Although the fundraising could be overwhelmingly led by Japanese banks, which have among the region’s weakest capital levels, analysts say lenders in Australia and India may also need to raise more equity.
   The push to issue new shares will hurt banks’ share prices and test the patience of long-term investors.
   “Across Asia, Japanese banks stand out as needing more capital if new standards are imposed,” said Jason Rogers, credit analyst at Barclays Capital in Singapore. “The big question is how much they may have to raise and over what period of time.”
   Japanese banks have already raised $15 billion this year through issuing common equity, according to Thomson Reuters data. They have raised another $10 billion through instruments such as preferred securities and preferred shares, Goldman Sachs says.
   But those preferred securities and shares are not considered “high quality” capital, and are unlikely to help meet the coming regulations.
   That means Mizuho Financial Group <8411.T> and Sumitomo Mitsui Financial Group <8316.T>, Japan’s No. 2 and No. 3 lenders, may need to seek as much as 2.7 trillion yen ($30 billion) from investors in the next few years, Goldman Sachs estimates.
   At a meeting in Pittsburgh last week, leaders from the Group of 20 rich and developing nations called for new capital rules to be introduced by 2010, and adopted by 2012. While the G20 has no lawmaking power, it sets the tone for institutions that do.
   The most stringent requirements are expected to only apply to banks with international operations, which may be a saving grace for the many Asian lenders still focused on their home markets.
   In China, where banks are still moving toward adopting international standards, the largest and most international banks, such as Industrial and Commercial Bank of China <1398.HK> and China Construction Bank <0939.HK>, are seen as well capitalised.
   And in both South Korea and Singapore, analysts don’t expect banks to be squeezed too much by the new regulations, although some rules would crimp risk appetite.
   “When the economy turns around and banks try to expand leverages, new capital rules will put a break on their high-leverage strategy,” said Park Jeong-hyun, an analyst at Hanwha Securities in Seoul.
   Some, however, are not even waiting for the new capital regulations to be introduced. 
   Japan’s largest brokerage Nomura Holdings <8604.T> last week unveiled a $5.6 billion share sale plan aimed partly at meeting tougher capital requirements.
   Under current international requirements, banks must keep their Tier-1 capital ratios, a measure of financial strength, at 4 percent or higher.
   Many bank analysts, including those at Citigroup, assume Tier-1 requirements will be doubled to 8 percent and that a “core Tier-1″ standard of 4 percent will be introduced. Core Tier-1 capital has so far been interpreted as common equity and retained earnings.
   Daniel Tabbush, Asia banking analyst at brokerage CLSA in Bangkok, and others, say banks will need much more than just 4 percent core Tier-1 to build comfortable capital cushions.
   
   BILLIONS OR TRILLIONS?
   It’s not easy though to figure out who needs how much.
   Firstly, the G20 has yet to make clear what it will count as core Tier-1 capital, let alone give a minimum requirement. The new rules are also expected to limit the leverage banks can take.
   Analysts are therefore juggling various scenarios: Goldman Sachs describes its “base case” as a 4 percent minimum of core Tier-1. It also assumes that banks will be able to count 10 percent of their deferred tax assets as core Tier-1.
   Under that scenario, Japan’s Mizuho would need to raise 170 billion yen ($1.9 billion) in equity.
   But Goldman’s “bear case”, which assumes a core Tier-1 ratio of 6 percent and total exclusion of deferred tax assets, would mean Mizuho needs 1.9 trillion yen and Sumitomo Mitsui requires 834 billion yen.
   Australia’s banks — Commonwealth Bank of Australia <CBA.AX>, National Australia Bank Ltd <NAB.AX>, Westpac Banking Corp <WBC.AX> and Australia and New Zealand Banking Group <ANZ.AX> — are also likely to be pinched by the stricter requirements.
   RBS analyst Jarrod Martin reckons the banks could be required to hold a minimum level of high-quality capital against total assets rather than just risk-weighted assets.
   In that instance, at least two of the four, CBA and Westpac, will be undercapitalised, Martin said.
   CLSA’s Tabbush says the four banks will need to raise about A$25 billion to bring their capital ratios to 9 percent, which he thinks is necessary.
   In India, where 16 banks have a Tier-1 capital ratio of under 8 percent, analysts expect lenders to raise as much as $6 billion in 12-18 months. That could reach $10 billion if top lender State Bank of India <SBI.BO> were to hit the market.
   
   For a related Graphic, click: http://r.reuters.com/rec68d
   
   LOCAL LEEWAY
   It is also unclear how much leeway national regulators will allow their banks. Japan’s Financial Services Agency, for instance, is lobbying for flexible rules that take into account a bank’s risk appetite.
   Banks that are mainly engaged in plain-vanilla lending — as many Japanese banks are — should not need the same capital requirements as a risk-hungry investment bank, the FSA argues.
   Bankers have also argued that overzealous requirements will lead to a flood of rights offerings and wipe out investor appetite for banks’ equity.
    “You can’t raise the bar indefinitely because it will simply become uneconomic for the markets, for investors, to provide that capital,” said Brett Hemsley, Asia-Pacific head for financial institutions at Fitch Ratings in Tokyo.
   The fear of dilutive share offerings has also weighed heavily on financial stocks. 
   Japan’s banking index <.IBNKS.T> is down nearly 20 percent over the last three months. And investors aren’t happy with the prospect of further dilution.
   “By doing equity financing, banks are able to raise their capital and that’s all they want,” said Koichi Ogawa, chief portfolio manager at Daiwa SB Investments.
   “But it’s incredibly frustrating for long-term investors. We’re angry,” Ogawa added. ($1=89.41 Yen)
 (Additional reporting by Morag MacKinnon in SYDNEY, Narayanan Somasundaram in MUMBAI, Kim Yeon-hee in SEOUL, Samuel Shen in SHANGHAI and Kevin Lim in SINGAPORE) (Editing by Murali Anantharaman) ((david.dolan@thomsonreuters.com; +81-3-6441-1805; Reuters Messaging: david.dolan.reuters.com@reuters.net)) ((If you have a query or comment on this story, send an email to news.feedback.asia@thomsonreuters.com))
Keywords: ASIA BANKS/ 
   . Keywords: ASIA BANKS/ 
  
Friday, 02 October 2009 09:48:32RTRS [nT328096  ] {C}ENDS

Post Your Comment

We welcome comments that advance the story through relevant opinion, anecdotes, links and data. If you see a comment that you believe is irrelevant or inappropriate, you can flag it to our editors by using the report abuse links. Views expressed in the comments do not represent those of Reuters. For more information on our comment policy, see http://blogs.reuters.com/fulldisclosure/2010/09/27/toward-a-more-thoughtful-conversation-on-stories/
  •