Interesting analytics on bank capital & hybrid limits downunder
(Australia) - Standard & Poor's (S&P) calculation methodology and analysis of Australian bank capital and allowable hybrid limits provides an interesting view particularly in the current heightened interest in bank capitalisation from investors.
Whilst a regulatory view of capital concentrates on Tier 1 and Tier 2 ratios, S&P's analysis concentrates on a series of ratios known as Adjusted Common Equity (ACE) and Adjusted Total Equity (ATE). ACE looks to determine the level of "premium" quality capital that is available to support bondholders and creditors while ATE adds debt/equity hybrids within the allowable limits to the ACE capital ratio. S&P then overlays its own qualitative and quantitative view of an institution's capital with that of the regulator, given that a domestic regulator has a significant capacity to influence an entity's capital structure.
The "Big 4"Australian banks' 2002 ACE to risk-weighted assets ratios range from 4.79 percent to 6.28 percent, levels that are consistent with the banks' current 'AA' category ratings. "Although the ACE ratios across the sector have been falling steadily in the past decade, ratings have remained largely stable during this period, reflecting, among other things, an improvement in risk-management systems and the low risk nature of mortgage lending in the domestic context," according to S&P, with the caution, however, that its tolerance for further material diminution is declining.
S&P further notes that "the importance placed by bank management on the concept of shareholder value and Basel II, together with the enhanced use of equity as a management incentive and stakeholder performance-measurement tool, have focused the Australian banks' attention on the absolute quantum of capital they hold against the risks inherent in their businesses". "The Australian banks have been systematically re-engineering their capital bases via share buybacks, hybrid-debt issuances, and the acquisition of both banking and wealth-management entities in the past decade."
S&P's full calculation methodology and analysis can be found in the article "Australian Bank Capital - Real or Mirage From a Ratings Perspective?" at:
www.ratingsdirect.com.
The "Big 4"Australian banks' 2002 ACE to risk-weighted assets ratios range from 4.79 percent to 6.28 percent, levels that are consistent with the banks' current 'AA' category ratings. "Although the ACE ratios across the sector have been falling steadily in the past decade, ratings have remained largely stable during this period, reflecting, among other things, an improvement in risk-management systems and the low risk nature of mortgage lending in the domestic context," according to S&P, with the caution, however, that its tolerance for further material diminution is declining.
S&P further notes that "the importance placed by bank management on the concept of shareholder value and Basel II, together with the enhanced use of equity as a management incentive and stakeholder performance-measurement tool, have focused the Australian banks' attention on the absolute quantum of capital they hold against the risks inherent in their businesses". "The Australian banks have been systematically re-engineering their capital bases via share buybacks, hybrid-debt issuances, and the acquisition of both banking and wealth-management entities in the past decade."
S&P's full calculation methodology and analysis can be found in the article "Australian Bank Capital - Real or Mirage From a Ratings Perspective?" at:
www.ratingsdirect.com.
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