Bloomberg News

ICBC Faces Surcharge as Citigroup Drops With Deutsche Bank (1)

November 11, 2013

HSBC Bank Branch

HSBC Holdings Plc and JPMorgan Chase & Co. top the Financial Stability Board’s annual list of too-big-to-fail banks, which it produces in preparation for capital surcharge rules scheduled to be phased in starting in 2016. Photographer: Scott Eells/Bloomberg

Industrial & Commercial Bank of China Ltd. (601398) was added to the list of too-big-to-fail banks as global regulators revised the roster of lenders that must hold extra capital to prevent another financial crisis.

ICBC, China’s largest bank by assets, was the only firm joining the updated list of systemically important firms released yesterday by the Financial Stability Board. Lenders whose capital buffers were cut from last year included Citigroup Inc. (C:US), Deutsche Bank AG (DBK) and Bank of New York Mellon Corp., while Credit Agricole Group was told to add more.

Regulators are ranking financial firms by their potential to cause a global meltdown and demanding bigger financial cushions from them to avert any repeat of the 2008 credit freeze. While ICBC (1398) is the world’s most profitable lender, bad loans are rising at China’s top banks after a five-year credit spree. As for Western companies, Pri de Silva, an analyst at CreditSights Inc., said he’s surprised by some of the cuts.

Are these institutions “less interconnected than they were a year ago? That doesn’t seem likely,” said the New York-based de Silva. Some lenders may have gone “to the powers that be and made the case that they should be viewed from a different lens,” he said.

The revised list leaves only New York-based JPMorgan Chase & Co. (JPM:US), the largest U.S. bank by assets, and London-based HSBC Holdings Plc (HSBA), Europe’s biggest by market value, in line to face the top 2.5 percent surcharge. Citigroup and Frankfurt-based Deutsche Bank must meet a 2 percent target after previously being in the top category. Beijing-based ICBC’s surcharge is 1 percent, the same as Bank of China Ltd. (3988), which was already included last year.

Sole Increase

BNY Mellon, the world’s largest custody bank and based in New York, also dropped into the 1 percent cohort. Only Paris-based Credit Agricole was saddled with an increase, with the surcharge level rising to 1.5 percent from 1 percent.

Officials at lenders declined to comment on the changes or didn’t respond to inquiries.

The surcharge represents the amount of capital a bank must have beyond the minimums already set by international regulators to fortify banks against their own losses or an external economic shock. Officials decided in 2010 to more than triple thresholds for the core capital that banks should keep to absorb losses. The FSB produces the list in preparation for capital rules scheduled to be phased in starting in 2016.

Alterations to the FSB list were driven by “data quality improvements, changes in the methodology and changes in underlying systemic importance,” the FSB said.

Higher Ratios

ICBC won’t need to raise more capital because its ratios exceeded minimum regulatory requirements, the bank said in an e-mailed statement today. As a global systemically important bank, ICBC said it needs to meet a minimum core tier 1 capital ratio of 8 percent.

The lender had a ratio of 10.48 percent as of June 30, while Bank of China’s was 9.27 percent, stock-exchange filings in August show. Those levels were higher than the 8.5 percent the China Banking Regulatory Commission requires the nation’s systemically important banks to hold by the end of 2018.

“ICBC is not facing a huge issue in maintaining its capital level, but it does face pressure,” Chen Xingyu, a Shanghai-based analyst at Phillip Securities Group, said by phone today. “It needs capital to support loan growth.”

ICBC said its growing international business was a “key factor” behind its addition to the FSB’s list. The bank’s overseas assets amounted to $182.2 billion at the end of June, representing 6 percent of its total assets.

Largest Purchase

The Chinese lender started expanding overseas with its 2006 purchase of a 90 percent stake in PT Bank Halim Indonesia. In March 2008, ICBC bought 20 percent of Standard Bank Group Ltd. (SBK), Africa’s largest, for $5.4 billion, in the biggest overseas acquisition by a Chinese bank.

ICBC shares in Hong Kong lost 0.4 percent to HK$5.34 as of 10:55 a.m. local time. Bank of China dropped 0.6 percent, while the benchmark Hang Seng Index sank 0.6 percent.

The FSB didn’t provide an explanation for its changed view on Citigroup and Deutsche Bank.

Citigroup, run by Chief Executive Officer Michael Corbat, reached an agreement last September to sell a remaining stake in its Smith Barney retail brokerage to Morgan Stanley (MS:US) by 2015. The New York-based bank also trimmed a portfolio of unwanted assets by 29 percent to $122 billion in the 12 months through September.

Deutsche Bank, Germany’s biggest lender, announced a plan at the end of July to shrink its balance sheet 16 percent by 2015 to meet stricter leverage standards.

Capital Plans

The reduction in Citigroup’s requirement may free up as much as $6 billion in capital and allow the lender to pay more of its earnings to shareholders, Matthew Burnell, a bank analyst at Wells Fargo & Co. (WFC:US), wrote in a note to clients. Still, “U.S. bank regulators will remain cautious relative to international regulators for the near-term,” Burnell wrote yesterday.

U.S. banks must submit capital plans to the Federal Reserve and have them approved each year before they can increase shareholder payouts.

The capital surcharges are significant given the “overall burden” of new rules proposed by global regulators, including the FSB and the Basel Committee on Banking Supervision, said said Karen Shaw Petrou, managing partner of Washington-based research firm Federal Financial Analytics Inc., in an e-mail.

“The list is still very relevant to the fingered few,” Petrou said in an e-mail.

Basel Regulations

The FSB brings together central bankers, regulators and government officials from the Group of 20 nations to coordinate financial rulemaking. This year’s statement included methods for calculating the surcharges that were developed by the Basel committee, a group composed of regulators from 27 nations including the U.S., China and the U.K. to coordinate rulemaking.

The Basel group published details on how the surcharges are calculated, enabling banks to measure their systemic importance. Even with the added information, this year’s process and the shift in the rankings appear less transparent, said Barbara Matthews, managing director of BCM International Regulatory Analytics LLC, a Washington-based consulting firm.

“A kitchen-sink approach to transparency does not always provide clarity,” Matthews said in a phone interview. “It would have been much easier for everyone if clearer explanations had been provided.”

To see the revised FSB list of global systemically important banks, click here.

To contact the reporters on this story: Jim Brunsden in Brussels at jbrunsden@bloomberg.net; Dakin Campbell in New York at dcampbell27@bloomberg.net

To contact the editor responsible for this story: Anthony Aarons at aaarons@bloomberg.net


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Companies Mentioned

  • C
    (Citigroup Inc)
    • $48.91 USD
    • -1.09
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  • JPM
    (JPMorgan Chase & Co)
    • $57.67 USD
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