Canadian banks facing tougher capital requirements

investmentnews.com:

With economic storm clouds gathering, Canada’s bank regulator is considering stricter capital requirements that some analysts say have the potential to force Royal Bank of Canada, the nation’s biggest lender, to sell equity.

The banks, which make up the largest sector weighting on the S&P/TSX Composite Index, have dropped 4.6% this year, compared with the 4.3% advance in the broader market as concerns rise about a downturn in the country’s housing market and as quarterly results were largely a disappointment.

At the same time, the banks are running up against increasingly stringent rules in Canada, where the banking regulator has been raising minimum capital requirements. Currently, banks must keep a common equity tier one ratio of at least 11.5%. Analysts expect that ratio may climb to 12% in December, adding further pressure to the country’s biggest lenders.

Some analysts see a scenario in which RBC may need to issue additional equity in order to meet that threshold because it is also seeking to close its C$13.5-billion acquisition of HSBC Canada.

“If they raise it by 50 basis points in December and the banks have a couple weeks to get there, then it’s a problem,” National Bank analyst Gabriel Dechaine said by phone. “Royal becomes pretty tight against that minimum.”

The situation bears a resemblance to the Bank of Montreal selling C$3.15 billion ($2.31 billion) in shares in December after the Office of the Superintendent of Financial Institutions delivered a surprise 50 basis-point hike to the domestic stability buffer, aiming to keep clear of the regulatory requirement as it acquired Bank of the West.

Shares of RBC ended the day 0.6% lower at C$121.24 on Wednesday.

A similar financing round by RBC, which is also