David Prosser: The bank doth not protest too much
Thursday 14 October 2010
Outlook Standard Chartered's insistence yesterday that its £3.5bn rights issue has been launched primarily with the more stringent capital requirements of Basel III in mind was met with some scepticism in the market. After all, the bank raised £1bn in August 2009 and its Tier One capital ratio, at 9 per cent, is comfortably ahead of the 7 per cent required under Basel III. Might the cash call have more to do with amassing funds for acquisitions, some analysts wondered?
Well, maybe. No doubt Standard Chartered would be happier if it felt it had sufficient firepower to take advantage of any opportunities that come along, particularly since it is coming under greater pressure in many of its emerging markets strongholds – from HSBC in Africa, for example.
Still, it is perfectly credible that Standard Chartered's fund-raising genuinely does reflect an anxiety to get in first in what could turn out to be a battle of the banks to secure additional funding.
Although it is fair to say the Basel III agreement was not universally seen as as being heavy-handed on the banks, the headline rule changes do not reflect its challenges. That 7 per cent basic requirement might actually rise as high as 13 per cent during peaks of the economic cycle. And though the banks have eight years to put their house in order, many national regulators, including the Financial Services Authority in the UK, are pushing for speedier compliance.
Then there is the issue of risk-weighted assets. A bank's tier one capital ratio is its total capital divided by its risk-weighted assets. So if, as is expected once the final version of the Basel III rules are agreed, the definition of what counts as risk-weighted assets is widened, banks' current tier one ratios will fall.
Several analysts have published forecasts of how this might affect the larger banks. In each case, Standard Chartered falls into the middle of the pack. On that basis, the bank may well have concluded that if it is going to need additional capital for the sake of comfort, many others will be in the same boat. This cash call may be a case of buy now, while stocks last.
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