On March 30, JP Morgan downgraded the local banks for slightly different reasons. The report points out that credit costs and NPLs could rise against a background of weaker global growth for 2023 and 2024. The mini banking crisis for regional US banks and Credit Suisse is likely to lead to less liquidity, which could have a similar impact as interest rate hikes of as much as 200 bps, according to some US pundits. Against that backdrop, the US Federal Reserve may not be inclined to raise the Federal Funds Rate much further than its current level of around 5%.
The turmoil over Credit Suisse, AT1, tier 2, tier 1, CET1 and capital ratios may cause banks to hold fewer AT1 securities. This would mean they would need capital from elsewhere. If banks decide to hold more CET1 to make up for less AT1, then banks could decide to hold on to a larger portion of their net profit as this boosts retained earnings (the best kind of CET1). The local banks have a dividend policy of paying out around 50% of their earnings. More retained earnings means less dividends.
The second part of CET1 ratio is the risk-weighted assets denominator. CET1 can be higher If the denominator is lower. As a result, banks could be inclined to veer towards loans with lower risk-weights.
