Citigroup Inc (C), Bank of America Corp (BAC): What a Stable Banking System Means for Your Banking Stock

Page 1 of 2

The U.S. banking sector is facing more and more stringent capital requirements, the latest of which is the two-fold rise in the leverage ratio minimum to 6%. While some meet the proposed requirements, others don’t. Therefore, it’s unlikely that the Fed will set a minimum leverage capital target that significantly disadvantages the U.S. banks relative to their international counterparts. Nevertheless, I don’t expect a 6% level to be a more meaningful constraint on capital return for banks in the U.S.

Proposed requirements

Bloomberg reported that the Fed and the Federal Deposit Insurance Corporation (FDIC) are aiming to raise the leverage ratio minimum to 6%, which will be twice the international banks will be required to hold under the Basel III requirements.

Unlike the Tier 1 common ratio, which is based on risk-weighted assets, the leverage ratio is based on total assets. The proposed leverage ratio will incorporate certain off-balance sheet exposures such as derivatives and commitments.

Do the banks meet the proposed requirements?

Citigroup Inc (NYSE:C)

Among the large cap banks, Citigroup Inc (NYSE:C) and Bank of America Corp (NYSE:BAC) have the least leverage ratios of 4.6% and 5.1%, respectively. Both have over $650 billion of estimated off-balance sheet assets which add up to calculate the Basel III Tier 1 leverage ratio. In contrast, Capital One Financial Corp. (NYSE:COF) has the highest leverage ratio of 7.7% with the lowest amount of estimated off-balance sheet items ($52.7 billion). On average, the large cap banks have a 6.1% Basel III Tier 1 leverage ratio.

Under Basel I regulations, current assets like cash, Treasuries, and other assets receive a 0% risk-weighting. If these asset categories are eliminated from the calculations of total assets in the leverage ratio under the proposed regulations, Bank of America Corp (NYSE:BAC) would be pushed above a 6% leverage ratio. Citigroup Inc (NYSE:C) would be pushed to a 5.9% leverage ratio as of March 31, 2013.

What could they do to meet the proposed requirements?

Given the substantial increase in capital over the last few years, I believe the banks will engage in balance sheet management to meet the requirements. This, coupled with internally generated capital, should be sufficient to meet the proposed 6% leverage ratio target. Balance sheet management means the constraints banks put on their liquidity coverage ratio, net stable funding ratio, capital conservation buffer, and asset liabilities ratios.

Also, contrary to popular opinion, analysts at Credit Suisse see no dividend cuts by these large cap banks nor capital raising if the minimum leverage is set at 6%. Further, if the proposed leverage ratio is implemented, banks like Citigroup Inc (NYSE:C) and Bank of America Corp (NYSE:BAC), that fall short, would need to reduce their assets, including their off-balance sheet assets, by 17% on average.

Page 1 of 2
Comments
Insider Monkey Small Cap Strategy
Insider Monkey Small Cap Strategy

Insider Monkey beat the market by 52 percentage points in 24 months. Our beta is only 1.2 (don't click this link if beating the market isn't important to you).

Lists

Cheapest Cities to Visit in the US

Most Expensive Summer Camps

Most Expensive Animals in the World

Most Expensive Specialty Crops in the World

Movies That Took Ages to Make

The Longest Hollywood Films Ever Made

Most Expensive Concert Stages

The Richest Bands of all Time

10 Most Corrupt Countries 2013 List

10 Countries with the Highest Quality of Life Index

Most Expensive Mattresses in the World

5 Smallest Countries by Land Area

The Ultimate Heartbreak Songs

Richest Teenagers in the World

10 Most Haunted Places in America

10 Best Places to Retire in Florida East Coast

Top 10 Places to See Before You Die

Top 8 Countries in the World Where Justice Prevails

10 Richest States in America

15 Wealthiest Countries in the World

Richest Singers in the World

Most Expensive Tasting Menu in New York City

Most Expensive Baby Items in the World

Most Expensive Hotel Suites in Vegas

Most Expensive Brunch in New York City

Most Expensive Beef Cuts in the World

25 Best Colleges to Get a Job

Top 10 US Supermarkets

The 25 Most Dangerous Cities in the World to Visit

Most Expensive Xbox Games

Top 11 Cities Where Billionaires Live

Top 10 Most Charitable Companies in America

Most Expensive Seafood in the World

The 10 Wildest Conspiracy Theories

The 10 Best Job Markets in the US

Top 10 Accounting Scandals of All Time

The 25 Biggest Cities in the World

Top 10 Best Paying Virtual Jobs

Most Expensive Leather Shoes in the World

Top 6 Things to Buy in March

The 10 Most Stressful Jobs in America – 2014 List

Top 10 Jobs for Introverted People

Top 10 Honeymoon Destinations in the World

Top 10 Highest Paying Jobs in the World

Most Expensive Day-Care in New York City

The 10 Cheapest Places to Retire Abroad

Top 10 Most Expensive Luxury Cars in the World – 2014

Killer Small Business Ideas

The 50 Best Personal Finance Blogs

Most Expensive Apartments in New York City

Subscribe

Enter your email:

Delivered by FeedBurner

X

Thanks! An email with instructions is sent to !

Your email already exists in our database. Click here to go to your subscriptions

Insider Monkey returned 47.6% in its first year! Wondering How?

Download a complete edition of our newsletter for free!