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US dollar's strength to add to banks' capital needs

Tuesday, February 3, 2015 - 06:57
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The rising value of the US dollar could force big American banks, including Citigroup Inc, to hold more capital, reducing their profitability and attractiveness to stock investors, according to executives and an analyst.

[NEW YORK] The rising value of the US dollar could force big American banks, including Citigroup Inc, to hold more capital, reducing their profitability and attractiveness to stock investors, according to executives and an analyst.

Under a proposal that the US Federal Reserve released in December to make the financial system safer, capital requirements would increase for banks as measurements of their size and complexity increase.

Measurements in the Fed's proposed rule are based largely on international standards which use euros to benchmark the size of banks. Because the value of the euro has depreciated versus the dollar, some US banks now appear to be bigger in euros, which raises the rule's calculation of how much capital the banks must hold.

The euro declined around 12 per cent against the US dollar in 2014 and has dropped another 6 per cent since the start of 2015, as anticipation built that the European Central Bank would embark on a policy of buying government bonds to stimulate growth. The 1 trillion euro "quantitative easing" plan was formally announced in late January. "In some ways, the ECB's quantitative easing program probably added 50 basis points to every US bank's" capital requirements, Citigroup Chief Financial Officer John Gerspach said in a Jan 23 conference call with analysts. One basis point is equal to 0.01 percentage points.

Goldman Sachs Group Inc Chief Financial Officer Harvey Schwartz said on a recent conference call that the investment bank was examining how currency moves under the Fed's proposal would affect its capital.

Citigroup, JPMorgan Chase & Co and Bank of America Corp would each have to increase their capital ratios by 0.50 percentage points under the Fed proposal, given the euro's dwindling valuation, Nomura bank analyst Steven Chubak said in a Monday research report.

That would reduce return on equity, a measure of bank profitability, next year from 12.1 per cent to 11.6 per cent at Citigroup, from 12.9 per cent to 12.4 per cent at JPMorgan and 12.0 per cent to 11.4 per cent at Bank of America.

Chubak estimated that the lower returns could reduce the value of the stocks of the three banks by about three per cent.

Representatives from Citigroup, JPMorgan and Bank of America declined to comment.

As a caveat on his estimates, Chubak noted that how much more capital the banks have to hold depends in part on how big they are compared with 75 global peers. Changes in those banks' local currencies against the euro would have to be factored into US banks' needs.

REUTERS