39 Asia-Pac banks tipped to issue new shares, sell assets or cut dividends
By CONRAD TAN
(SINGAPORE) Nearly 40 banks in Asia may need to raise new share capital, cut dividends, or sell assets to raise cash in the coming months, according to Morgan Stanley.
DBS Group, HSBC and Standard Chartered Bank are among the major banks in the region that are most likely to call for new capital, Morgan Stanley analysts Matthew Wilson and Anil Agarwal said in a report this week.
The reason? The analysts predict the unfolding financial crisis and the economic downturn ahead will focus regulators’ attention on the most basic elements of banks’ capital cushion - ordinary shareholders’ equity and retained earnings - in assessing the banks’ capacity to withstand losses.
By their reckoning, banks will need a core equity capital base of at least 9 per cent of their risk- weighted assets or what the banks lend out, adjusted for the varying risk on different types of loans.
That ratio is well above the current regulatory minimum of 6 per cent, but the analysts believe the financial crisis will result in tighter regulation and greater capital adequacy requirements in the months ahead.
Also, the regulatory minimum of 6 per cent applies to Tier 1 capital, which includes funds raised from the issue of debt-equity hybrid instruments such as preference shares.
Such instruments were a popular source of capital in good times, as banks sought to boost their returns on core equity by raising Tier 1 capital without expanding the size of their ordinary equity base.
‘It used to be that less was better than more as bank management sought to financially engineer higher returns and investors demanded extra efficient allocation of capital in what was a very benign super-cycle. That now looks like history,’ say the Morgan Stanley analysts.
‘We believe the focus now returns to core equity Tier 1 as a more prudent, pure and hence higher- quality measure of capital adequacy.’
By their estimates, 39 banks operating in the Asia-Pacific - including DBS, HSBC, Maybank and Stanchart - have a core equity capital ratio of less than 9 per cent and may need to beef up their capital buffers by paying out less in dividends, selling assets, or issuing new ordinary shares.
DBS had a reported Tier 1 capital ratio of 9.7 per cent at the end of September, but Morgan Stanley’s measure, which strips out preference shares, puts its core equity capital base at just 7.5 per cent of risk- weighted assets.
To reach a core equity capital ratio of 9 per cent, DBS would need to raise an additional US$1.9 billion, they estimate.
OCBC Bank and United Overseas Bank (UOB) are not among the 39 - they have a core equity capital ratio of 10.4 per cent and 9.3 per cent respectively, by Morgan Stanley’s estimates, compared with their reported Tier 1 capital ratios of 14.4 per cent and 11.2 per cent at the end of September. When contacted, both OCBC and UOB said that they had no immediate plans to issue new shares, divest assets or change their dividend policy to boost capital. DBS did not respond to BT’s queries by press time.
‘Korean, Australian and regional banks - Standard Chartered, HSBC and DBS - show the highest risk of a capital call; generally these banks also grew fast, embraced gearing and new forms of capital,’ say the Morgan Stanley analysts.
‘They also confront difficult macro and credit cycles and the pro-cyclicality of Basel II,’ they add, referring to a common criticism of the Basel II capital adequacy guidelines that give banks an incentive to set aside less capital in good times when the risk of default on loans is expected to be low.
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DBS May Need to Raise New Capital: Morgan Stanley
39 Asia-Pac banks tipped to issue new shares, sell assets or cut dividends
By CONRAD TAN
(SINGAPORE) Nearly 40 banks in Asia may need to raise new share capital, cut dividends, or sell assets to raise cash in the coming months, according to Morgan Stanley.
DBS Group, HSBC and Standard Chartered Bank are among the major banks in the region that are most likely to call for new capital, Morgan Stanley analysts Matthew Wilson and Anil Agarwal said in a report this week.
The reason? The analysts predict the unfolding financial crisis and the economic downturn ahead will focus regulators’ attention on the most basic elements of banks’ capital cushion - ordinary shareholders’ equity and retained earnings - in assessing the banks’ capacity to withstand losses.
By their reckoning, banks will need a core equity capital base of at least 9 per cent of their risk- weighted assets or what the banks lend out, adjusted for the varying risk on different types of loans.
That ratio is well above the current regulatory minimum of 6 per cent, but the analysts believe the financial crisis will result in tighter regulation and greater capital adequacy requirements in the months ahead.
Also, the regulatory minimum of 6 per cent applies to Tier 1 capital, which includes funds raised from the issue of debt-equity hybrid instruments such as preference shares.
Such instruments were a popular source of capital in good times, as banks sought to boost their returns on core equity by raising Tier 1 capital without expanding the size of their ordinary equity base.
‘It used to be that less was better than more as bank management sought to financially engineer higher returns and investors demanded extra efficient allocation of capital in what was a very benign super-cycle. That now looks like history,’ say the Morgan Stanley analysts.
‘We believe the focus now returns to core equity Tier 1 as a more prudent, pure and hence higher- quality measure of capital adequacy.’
By their estimates, 39 banks operating in the Asia-Pacific - including DBS, HSBC, Maybank and Stanchart - have a core equity capital ratio of less than 9 per cent and may need to beef up their capital buffers by paying out less in dividends, selling assets, or issuing new ordinary shares.
DBS had a reported Tier 1 capital ratio of 9.7 per cent at the end of September, but Morgan Stanley’s measure, which strips out preference shares, puts its core equity capital base at just 7.5 per cent of risk- weighted assets.
To reach a core equity capital ratio of 9 per cent, DBS would need to raise an additional US$1.9 billion, they estimate.
OCBC Bank and United Overseas Bank (UOB) are not among the 39 - they have a core equity capital ratio of 10.4 per cent and 9.3 per cent respectively, by Morgan Stanley’s estimates, compared with their reported Tier 1 capital ratios of 14.4 per cent and 11.2 per cent at the end of September. When contacted, both OCBC and UOB said that they had no immediate plans to issue new shares, divest assets or change their dividend policy to boost capital. DBS did not respond to BT’s queries by press time.
‘Korean, Australian and regional banks - Standard Chartered, HSBC and DBS - show the highest risk of a capital call; generally these banks also grew fast, embraced gearing and new forms of capital,’ say the Morgan Stanley analysts.
‘They also confront difficult macro and credit cycles and the pro-cyclicality of Basel II,’ they add, referring to a common criticism of the Basel II capital adequacy guidelines that give banks an incentive to set aside less capital in good times when the risk of default on loans is expected to be low.
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