Houston community bankers don’t like the proposed Basel III rule any more than their counterparts across the rest of the country.
With the federal government’s Dodd-Frank already requiring millions in compliance expenses — money that doesn’t generate revenue for banks — community bankers say the rule could force the banks to take more money they use to make loans and put it in loss reserves, essentially curtailing how much they lend to local small businesses, residential customers and other borrowers.
Basel III is a proposed rule that federal regulators could use to raise capital requirements at banks. It targets how much money a bank has to cushion loan losses if borrowers don’t pay.
The proposed rule is currently up for public comment, and bankers across the U.S. and even Puerto Rico asked regulators to delay Basel III so they could see how it would impact them. Some of my sources here, who recently spoke to me about their outlook on the Houston banking market, sounded off on the proposed rule.
“This new deal called Basel III — a lot of small bankers don’t know if that’s an herb or a regulatory (requirement),” said David Zalman, CEO of Prosperity Bank. “But in Basel III, they were really specific with Dodd-Frank to say it’s not going to affect community banks — well, to the contrary, it’s probably affecting community banks more than anyone because community banks have a higher loan-to-deposit ratio, and the more loans you have, the more capital is required based on the risk in those loans.”
Zalman said that in the past, smaller banks have been able to raise money by issuing trust preferred. Regulators let banks count that as capital, but that won’t be the case much longer — in fact, banks with trust preferred on their books will be required to begin reducing that by at least 10 percent a year for the next decade.
“That’s going to affect a tremendous amount of small banks,” Zalman said.
It isn’t just bankers weighing in on the potential impact of the proposed rule — other observers agree with Zalman’s assessment that Basel III could hit small community banks hardest in the wallet.
Craig McMahen, a managing director for New York-based Keefe Bruyette & Woods, said that industrywide, smaller institutions with less than $500 million in assets are going to have a much harder time making money under Basel III.
“It’s having scale that allows you to spread a lot of those fixed costs across a much bigger base of business,” McMahen said. “And if you have asset quality problems, then your expenses are up significantly because you have to build your reserves against bad assets.”
Thirty-two banks based in Houston had less than $500 million in assets in the first quarter, and the median loan-to-deposit ratio for Houston-based financial institutions was 78.7 percent, according to data from FBR Capital Markets & Co. in Houston.
Meanwhile, earnings haven’t been stellar. In the first quarter, median return on assets for local banks was 0.6 percent, median return on equity was 5 percent, and net interest income had a median at 3.61 percent.
While Basel III’s implications for banks across the U.S. loom large, some are more optimistic for banks in Houston. The area still offers what most markets across the country don’t: lending opportunities.
“The beauty of our community is that (Houston companies) actually have customers that have growth requirements, and we’re positioned to meet those needs,” said Roland Williams, president and CEO of Houston-based Post Oak Bank. “There’s a lot of liquidity and a lot available capital to lend.”
That means banks here could have an edge in taking on new capital rules.
– Houston Business Journal ( http://lnkd.in/A4mCTn from bizjournals.com )