Published September 12, 2008

Bank writedowns reach US$511 billion

Many busy raising capital, bracing for rise in bad loans

By CONRAD TAN
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(SINGAPORE) Banks worldwide have suffered more than US$510 billion in writedowns and losses since the credit crisis started. And even those that haven't been hit badly are bracing themselves for possible loan losses by shoring up their capital buffers.

A look at their capital positions at end-June suggests that most major banks are comfortably above the minimum required by regulators in normal times.

But these are not normal times. Last weekend's rescue of US mortgage finance giants Fannie Mae and Freddie Mac, and growing doubts over the future of investment bank Lehman Brothers, which reported massive losses on Wednesday, show how quickly multi-billion dollar capital cushions can be crushed by mountains of bad debt.

Scott Bugie, credit analyst at rating agency Standard & Poor's (S&P), said yesterday that problems in the US banking sector are likely to continue well into next year. 'It won't be until 2010 that we see more stabilisation in banking performance.'

By Sept 10, banks had reported an estimated US$511.1 billion in asset writedowns and credit losses since the start of 2007, according to data compiled by Bloomberg, based on that day's exchange rates.

Kenneth Rogoff, a former chief economist at the International Monetary Fund, told BT in a recent interview that he expects many more US banks to collapse, including a major investment bank.



As overall economic growth slows, there simply won't be enough profit to sustain the current number of banks, he said. 'The financial sector is still in trouble. It needs to shrink.'

Despite the extensive damage already suffered by the banking sector, Mr Rogoff and several others expect worse to come. Nouriel Roubini, an economics professor at New York University, is forecasting that losses from the credit crisis will exceed US$1 trillion and could even reach US$2 trillion.

To replenish their capital reserves, most banks have been busy raising new funds through share or bond issues or by selling assets for cash - a total of US$359.4 billion since July last year, according to Bloomberg.

Citigroup has written down the most so far in credit-related losses - some US$55.1 billion. It has also raised the most capital by a bank - US$49 billion since July last year.

Its tier 1 capital ratio - a measure of a bank's ability to withstand losses - at end-June was 8.7 per cent, although the sale of its German retail banking operations in July is expected to boost the figure to 9.3 per cent when completed later this year.

Others, such as Swiss bank UBS, have also been busy raising funds to bolster their balance sheets.

Broadly speaking, the tier 1 ratio is the proportion of capital from shareholders that a bank holds in reserve against the money it lends, adjusted for the varying risk on different types of loans. The higher the tier 1 ratio, the safer a bank is supposed to be.

But direct comparisons of banks' tier 1 ratios as an indication of their financial strength are difficult.

Standalone investment banks in the US such as Lehman, Goldman Sachs, Morgan Stanley and Merrill Lynch are regulated separately from commercial banks such as Citigroup and JP Morgan which take deposits from retail customers.

Commercial banks are required by the US Federal Reserve to maintain a tier 1 ratio of at least 6 per cent to be considered well-capitalised, while investment banks - which come under the US Securities and Exchange Commission - are not subject to a similar requirement.

In fact, the investment banks only started reporting their tier 1 ratios in the second quarter, after the collapse of Bear Stearns triggered heightened scrutiny of their capital positions.

Also, US investment banks - like Singapore banks - calculate their tier 1 capital ratios using the newer Basel 2 guidelines, while US commercial banks still follow Basel 1, a point that has sparked controversy recently in the US.

And as the troubles at Lehman, Fannie Mae and Freddie Mac have demonstrated, capital alone is no shield against a loss of confidence by investors.

Singapore banks - which have written down about $700 million so far - are well-capitalised, say analysts here. But even they have recently been beefing up their capital bases through preference share issues.

Banks heavily exposed to the worst-hit economies in the US and Western Europe are bracing themselves for a rise in bad loans in coming months, as economic growth slows or stalls. For some, however, massive writedowns are gobbling up their capital buffer as fast as they can rebuild it.

Lehman's tier 1 ratio of 13 per cent at end-June was the highest among the major banks, after it raised US$6 billion in June through a share offer, but the bank is now struggling to raise more through asset sales after suffering crippling losses in its fiscal third quarter due to gross writedowns of US$7.8 billion on mortgages and other assets. It now faces possible downgrades by debt rating agencies S&P and Moody's.