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The market rally that has taken shares in some of Wall Street’s biggest banks to all-time highs is about to receive an additional boost from an unlikely source: a set of rules known as the “Basel III Endgame”.
Basel III bank capital reforms, first proposed in July last year, have sparked an intense battle between banks and their regulators. The proposals look to impose higher capital requirements on US banks with at least $100bn of assets.
Preliminary estimates suggest that banks covered under the proposals could face an increase of 16 to 20 per cent in required capital holdings. Those bracing for the worst have been building up reserves. The 12 large cap banks followed by Morgan Stanley analysts, including PNC, JPMorgan Chase, Bank of America and Wells Fargo, now have more than $180bn of excess common equity tier one capital — a record high.
Some of that excess capital could find its way to investors in the form of buybacks and dividends if capital requirements are pared back. Last month, Jay Powell, chair of the Federal Reserve, said “broad and material changes” were likely to be made to bank capital rule proposals. The comments have fuelled hope that the Fed is considering watering down the capital requirements under Basel III. The hit to large banks could end up being roughly half the sum initially feared, some bankers think.
JPMorgan, one of the most outspoken critics of Basel III, is among those sitting on large amounts of excess capital. It is expected to report a 15.2 per cent CET1 ratio when it unveils earnings on Friday. That is well above its required minimum of 11.9 per cent. An unexpected move last month to raise its dividend suggests JPMorgan is keen to return money to shareholders.
One thing that could give America’s biggest bank pause, however, is the rally in its share price. It is trading at a record high after a 55 per cent increase over the past 12 months. Another is optics. Regulators may not look too kindly on banks that increase share buybacks just a year after Silicon Valley Bank, Signature Bank and First Republic Bank all failed.
Still, analysts at Bank of America say a weakened Basel III could translate into a 10 per cent boost to their earnings per share forecast for the big five Wall Street banks.
Banks do not usually update on capital return plans until the annual stress-testing process ends in June. But keep an eye on share buyback comments this earnings season. They could provide an important clue.
