A big bank breakup by other means?
The nation’s financial giants have come a long way in building their capital since the financial crisis, but they still have a lot of ground to cover as new global standards are phased in.
Investors have begun to wonder whether splitting core units apart might be the best route to returning capital to shareholders.
JPMorgan Chase & Co. appears to have made the most progress among the Big Four under the Basel III rules. It has also chafed the loudest against the requirements, and demanded more clarity on the implementation timetable required by supervisors.
“I call it capital confusion,” Jamie Dimon, the company’s chief executive, said during its earnings call in October. “It is hard to tell what we are supposed to do, how we are supposed to do it.”
After a meeting with Dimon and investors in November, analysts at KBW Inc.’s Keefe Bruyette & Woods Inc. wrote in a research note that it is conceivable JPMorgan Chase would spin off its Chase retail unit “to better manage capital.” The analysts cited the potential advantage for competing consumer banks that will not be subject to capital surcharges designed to protect the economy from failures among the behemoths.
JPMorgan Chase estimated that it had achieved a ratio of Tier 1 common equity to risk-weighted assets of 7.6% under the Basel III guidelines by the end of the second quarter (see charts), clearing an effective universal minimum of 7% but shy of a threshold of up to 9.5% that will apply to systemically important institutions. (Neither figure includes a countercyclical buffer of up to an additional 2.5% that regulators could impose if they detect signs of froth in credit markets.)
The company paused in its capital buildup in the third quarter, however, as it bought back $4.4 billion of its stock, completing an $8 billion repurchase program for the year that had been approved by the Federal Reserve. JPMorgan Chase’s Basel III Tier 1 common ratio edged up only another tenth of a percentage point to 7.7% at Sept. 30.
Since the company is under pressure from regulators to meet the new standards sooner than later, the tempo of its repurchases could slow for some time. The KBW analysts have now penciled in buybacks they had expected to take place in 2012 for the following year.
With an estimated 7.4% Basel III Tier 1 common ratio through the third quarter, Wells Fargo & Co. appears to be in the second-strongest position under the new rules. It has not struck the same tone of frustration that JPMorgan Chase has, but it has also been more cautious in its repurchases, buying back about $1.8 billion of stock in the first nine months.
Timothy Sloan, Wells' chief financial officer, told analysts in October that he was not "pessimistic at all" about upcoming stress tests during which companies will seek regulatory approval to distribute capital to shareholders next year.
Citigroup Inc. does not provide quarterly estimates of its position under Basel III, but it has been steadily bolstering its capital measures under the old rules, lifting its Tier 1 common ratio by about 1 percentage point since the end of last year, to 11.7% at Sept. 30. It says it plans to begin returning capital to shareholders next year and that it expects to achieve a Basel III Tier 1 common ratio of 8% to 9% by the end of 2012.
Staggered by heavy blows over its mortgage liabilities, Bank of America Corp. has been executing acrobatic maneuvers to make progress toward the new standards.
As a group, the Big Four’s capital ratios have been strengthened in large part because the companies have shed assets with high risk weightings. This has been particularly true at B of A, where the ratio of risk-weighted assets to assets has fallen 11.4 percentage points from the end of 2008 to 61.3% at Sept. 30.
Recent steps at the company have included disposals of credit card operations outside the U.S., sales of shares in China Construction Bank Corp., and deep cuts in B of A’s mortgage origination business designed in part to reduce intangible assets associated with servicing loans that are costly from a capital standpoint.
B of A is also working on transactions to draw in additional core capital, including a recent investment by Berkshire Hathaway Inc. and the possible issuance of up to 400 million shares to retire preferred stock. B of A has projected it will reach a Basel III Tier 1 common ratio of 6.75% to 7% at the end of next year.
Whether they are approaching the task from a position of relative strength or weakness — and whether or not the new capital rules are still too weak — the Big Four are showing signs of strain as they make the transition to a new capital order.