HSBC announces the best Tier 1 capital ratio among European banking giants

Improving market conditions in Europe, coupled with the continued efforts of Europe’s largest banks to streamline their business models, have helped these banks consolidate their Common Equity Tier 1 (CET1) ratio over the past few quarters . While UBS still has the most comfortable CET1 capital ratio margin of 390 basis points (3.9% points) over its 2019 regulatory target, HSBC now has the highest CET1 ratio of 14, 3% among the major European banks. HSBC’s gains were mainly due to the favorable regulatory treatment of its minority stake in Hong Kong’s Bank of Communications. Notably, German banking giant Deutsche Bank managed to improve its core capital ratio cushion from just 30 basis points (0.3% points) at the end of the third quarter of 2016 to 110 basis points (1.1 % dots) now.

The figures at the end of the first quarter of 2017 and the full implementation target for 2019 compiled here are as reported by each of these banks in their latest quarterly reports.

The CET1 ratio is a key quantitative measure used by financial regulators to assess the soundness of a bank. Additionally, regulators around the world use this metric as part of their annual stress tests to ensure that a bank’s one-year capital plans do not jeopardize its capital position in the event of a downturn. A greater difference between current and target CET1 ratios gives a bank more leeway to distribute cash to investors in the form of share buybacks and dividend increases.

We represent dividend payouts and share buybacks in our analysis of HSBC as an adjusted dividend payout rate, as shown in the table below. Note that we represent this payout ratio as 0% in the chart for the year 2016, as HSBC paid dividends of over $7 billion and repurchased shares worth $2.5 billion. dollars, while reporting net income of $1.3 billion, representing an adjusted payout figure of almost 740.%, which skews the data. You can understand how a change in HSBC’s adjusted payout ratio affects its stock value by editing this table.

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Sallie R. Loera