Thursday, January 7, 2010

New capital rules looking negative for Canadian banks

Posted on the Globe & Mail Streetwise by Tara Perkins:

Having had some more time to digest the new capital rules that the Basel Committee proposed in late December, analysts are increasingly adopting the view that the regulations will put a noticeable dent in the Canadian banks’ capital levels when they come into force.

“If enacted today, these proposals would have a material negative impact on Canadian bank’s Tier 1 capital ratios, in our view,” RBC Capital Markets analyst Andre-Philippe Hardy, one of the analysts to weigh in on the topic this week, said in a note to clients.

He estimates that if the proposed rules were put in place now, the major banks’ median Tier 1 ratio would drop from 12.1 per cent to 8 per cent. And as a result of that potential impact, he expects the banks to hold off on dividend increases or share buybacks until the rules are finalized in late 2010.

The potential new global rules are one of the many ways that international regulators are attempting to prevent a repeat of the credit crisis. The Basel Committee hopes to have final rules agreed to by the end of this year, and to put them in place by the end of 2012.

But Mr. Hardy says that the proposals are likely to be diluted between now and then, and notes that the banks will have at least three years to prepare for them. He also points out that all of the Canadian banks would still exceed the minimum capital requirements that this country’s regulator, the Office of the Superintendent of Financial Institutions, currently requires.

TD Securities analyst Jason Bilodeau said he thinks the proposals could cause Tier 1 capital to fall 20 to 45 per cent overall, but he too expects major revisions and clarification of the rules in coming months.

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