U.S. banks led by Goldman Sachs are seen to be the biggest winners in any overhaul of global banking norms, expected to be announced at the year-end or in early 2017. In contrast, European banks could face a 20% downside if the so-called Basel IV regulations require banks to maintain higher capital, Morgan Stanley, which evaluated the potential impact of new rules on 75 global banks, said in a research note Nov. 21.
The report titled, “Insight: ‘Basel IV’ – Exploring the Next Wave of Bank Regulation,” expressed caution on banks in Australia, where local regulators back stiffer standards.
Basel IV Would Be A Relief For U.S. Banks
“U.S. banks would look best placed. In addition to being a play on steepening yields, Basel IV would not bring any additional impact for credit risks. We think Goldman would be likely to see the greatest relief from any softening in the FRTB proposals, and our work reinforces our broader positive view on U.S. large cap banks, with up to 10% median EPS upside potential (20%+ for biggest beneficiaries) if all excess capital is returned, positive for Citi, JP Morgan and BoA.”
American banks, which already face stringent standards under the Dodd-Frank Act, may have further upside. President-elect Donald Trump, who will take office in January, has pledged to reduce regulation and cut taxes. He also could impose a moratorium on new regulation and dismantle some parts of the Dodd-Frank Act, Morgan Stanley said.
“Trump’s success may not necessarily signal a material change in this area of the proposals, though we believe could improve the odds should the U.S. becomes less committed to the drive to lower variability of models,” the report said.
A global panel is evaluating a new set of proposals intended to bring global banks closer together in how they weigh asset risks. While European banks seek a more favorable capital regime, Australian banks favor tighter regulations.
However, a pragmatic set of regulations with “no significant increase in capital’ is expected, Morgan Stanley said. “In our base case we (and consensus) assume the Basel Committee softens the current proposals to minimal RWA inflation given the growth that is imperative in Europe and elsewhere,” the report said.
A bear case in which banking norms are not softened, Morgan’s bottom-up scenario analysis suggests, would imply additional capital of between €250 billion and €410 billion for global banks excluding the U.S.
Morgan Stanley’s downbeat outlook for European banks, is based on capital erosion, given the implied 20-30% RWA inflation in the “bear case.”
Dutch, Nordics and U.K. banks are seen to be the most vulnerable, reinforcing “caution” on ING and Handelsbanken. A bear case outcome could challenge overweight ratings on Lloyds and ABN.
Spanish banks would be among the least affected and also “among the most geared to any steepening in yields,” Morgan Stanley said, while reinforcing its positive view of Bankia and Caixa.
Morgan Stanley expressed caution on Commonwealth Bank of Australia and National Australia Bank, saying any likely outcome would not positively impact Australian banks. That is because local regulators see will be Basel-IV as a minimum standard and resolve to push for “unquestionably strong” capital.
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