Capital adequacy ratios
Until now, the most popular ratio in determining a bank’s capital adequacy was the amount of Tier 1 capital it had as a percentage of total assets. Tier 1 capital is used to measure a bank’s ability absorb losses without a bank being required to cease trading.
Today, attention has been refocused on banks’ tangible common equity, or TCE. TCE is a bank’s assets minus all its liabilities and, most importantly, all of its preferred shares and intangible assets like goodwill, brand names and patents. In short, tangible common equity shows what common shareholders would get if the company was liquidated.
Banks’ TCE ratios had historically been between 3 percent and 5 percent before the credit crisis. Today, Citigroup’s TCE ratio is 1.5 percent, Bank of America’s ratio is 2.83 percent and J.P. Morgan’s ratio is 3.8 percent.
Companies have some discretion as to what their TCE ratios are, but those with a TCE below 3 percent of assets should consider raising more capital. Because these companies would have difficulty raising capital in a stock sale, some (like Citigroup and AIG) are asking the government for assistance.
The government’s injections so far have been through buying preferred shares, which increase a bank’s Tier 1 capital but does not increase its TCE ratio. To help bolster banks’ TCE, it sounds like the government plans to convert some of its preferred shares into common shares.
What is troubling about this “reclassification” of balance sheet items is that the government is, in effect, changing the accounting rules. This leads me to wonder, why not just adjust the fair-value, or mark-to-market, accounting rule? While I understand the merits of fair-value accounting, it seems to me that there must be a better valuation methodology that is less volatile.
Garmin (GRMN) +7.32%
Garmin, maker of GPS devices, reported earnings that missed analyst expectations and opted not to give 2009 guidance until the “outlook for the year becomes clearer.”
Revenues fell 13.9 percent year-over-year and operating margins slipped 200 basis points compared to the third quarter and 310 basis points from the prior year.
Garmin’s Outdoor/Fitness segment had revenue increase 5 percent in the quarter, but Automotive/Mobile revenue plunged 17 percent, Aviation revenue was down 5 percent and the Marine segment turned in flat revenue for the quarter.
Still, the stock managed to rally today on reduced inventory. Garmin said it reduced its inventory by $274 million in the quarter, up from expectations of a drop of about $150 million in inventory levels by the end of the year.
UnitedHealth Group (UNH) -14.87%
Health insurers took a beating after Humana Inc. said the 2010 preliminary rates for the U.S Medicare Advantage program would have a “significant adverse impact” on premiums and benefits for plan members.
Bloomberg reports, that Humana, UnitedHealth Group and other insurers with U.S. Medicare-backed health plans for the elderly and disabled would get a rate increase of 0.5 percent in 2010, far less than premium growth projected by analysts that ranged as high as 2 to 4 percent growth.
Quick Hits
Peter Lazaroff, Junior Analyst
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