3 Banks That Should Thank Regulators for Revised Basel III Rules
The banks got their way again.
Global regulators announced on Sunday that they're relaxing the new Basel III rules, which had been much maligned worldwide by banks during the past two years. Regardless of whether this move was a good thing or a bad one (it can certainly be argued either way), the change came at just the right time for the banks -- three in particular. Here's what was changed, who it'll affect, and what investors should look out for going forward.
The revisions that global regulators made to the Basel III rules are kind of a big deal. The two biggest changes were an extension of the timeline for compliance and expansion of the rule's asset classifications.
In the original draft of Basel III, banks were to be compliant with the new capital requirements Jan. 1, 2015. Under the revised edition, banks have until 2015 to be 60% compliant, with annual increases building to full compliance in 2019. It's easy to see why pushing out the deadline to meet the rules capital requirements is good for banks -- it puts less pressure on them to raise capital quickly, spreading out (and potentially saving) funding costs. Those costs saved may actually benefit bank customers as well, who generally are on the receiving end of additional fees to cover added costs.
The second revision, a change in assets that count toward a bank's capital reserve, is the biggie. Originally, Basel III required that banks hold a very narrow selection of "high quality" assets -- think cash, government securities, and only very-highly rated corporates. But the banks argued that holding low-yield capital under the Basel III rules would make it more difficult to generate the income needed for increased lending -- something that the slow-moving economic recovery needs.
Regulators made serious concessions to address the banks' concerns:
- Corporate debt with a BBB- rating or higher may be included in capital reserves, but will be discounted as much as 50% of its value. Any corporate debt previously allowed had to be rated AA- or higher.
- Highly rated residential mortgage-backed securities and some equities will also be allowed. Again, asset value will be discounted between 25%-50%.
All of the newly allowed assets will be limited to 15% of a bank's total capital reserve, but it will still make a huge difference to banks still trying to raise their balances.
And the winner is...
While it seems that most banks benefit from Basel III 2.0, you may see the impact on stock prices vary based on a bank's size. The new rules will allow smaller banks more leniency and time to raise capital, which was (under Basel III 1.0) feared to be a real problem. But larger banks, the ones that are already in compliance with the old Basel III rules, are set to be the biggest winners.
It has already been estimated that U.K.-based Barclays will get a 4% boost in pre-tax earnings just from the rules being relaxed. It doesn't even have to lift a finger to reap the rewards. By having built up its capital reserve already, the bank will save on future funding costs. The new rules may also relax the negative view most Western European banks have had on lending in Eastern Europe, Asia, and the Middle East. Many cut their ties with borrowers in those areas in favor of government-related entities, according to Martin Kohlhase, a corporate finance analyst at Moody's Investors Service. Lower capital requirements will allow international banks to lend more broadly in these regions without fear of draining their reserves.
Back here in the states, one bank in particular may have been happiest to hear about the revised rules: Bank of America . The bank's last earnings release in Sept. 2012 swept away analyst criticism by proving itself to be the best capitalized bank in preparation for Basel III.
Tier I Capital Balance
Capital Ratio Under Basel III
Bank of America
With its capital situation handled (thanks to efforts from CEO Brian Moynihan), Bank of America is in the best shape we've seen it since the financial crisis. For Bank of America, the rule changes couldn't have come at a better time. Capital plans from the nation's banks were due to governmental regulators this past Monday, and with its stronger balance sheet and improved capital reserves, B of A stands to get good marks. Investors may get the most out of the bank's good grades, since it and most of its rivals plan to argue for permission to increase their dividends.
Finally, one specific aspect of the rule changes may present an opportunity for the country's largest mortgage underwriter: Wells Fargo. The combination of the new rules (allowing RMBSes to count toward a bank's capital balance) and the return of mortgage borrowers to the scene creates opportunities for lenders like Wells to securitize the loans that are sitting on their books. Most of the banks have been hoarding their loans and staying away from securitizing them, and so far there have been no whispers about that changing . But if Wells or one of its compatriots got into a jam and needed to raise capital -- RMBSes may be an avenue they pursue.
In the end
The banks won another regulatory battle. Investors should keep an eye on what the banks choose to do with their capital reserves, now that they've got some wiggle room. Don't be surprised to see reductions, but be wary of large changes. Investors should also keep an eye on the stress test results, especially for Bank of America. If the bank is able to increase dividend, expect its price to jump. If you want to get in on B of A now, check out our in-depth company report on Bank of America. The report details Bank of America's prospects, including three reasons to buy and three reasons to sell. Just click here to get access.
The article 3 Banks That Should Thank Regulators for Revised Basel III Rules originally appeared on Fool.com.Jessica Alling has no position in any stocks mentioned. The Motley Fool recommends Wells Fargo. The Motley Fool owns shares of Bank of America, Citigroup, JPMorgan Chase, and Wells Fargo. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
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