HSBC's capital ratio fell while its core capital grew
The bank's latest results show why a capital ratio needs both sides of the calculation. Risk-weighted assets grew faster than common equity tier 1 capital.
A lower bank capital ratio does not necessarily mean the amount of capital declined. HSBC's third-quarter release offers a clear example of why investors need to read the balance and the ratio together.
In its October 27 earnings release, HSBC Holdings plc reports common equity tier 1 capital of $128.1 billion at September 30, up from $127.7 billion at June 30. Yet its CET1 ratio fell to 13.9% from 14.1%. The figures are in US dollars.
The denominator grew faster
CET1 compares core equity capital with risk-weighted assets, the regulatory measure used as the denominator. HSBC reports those assets at $922.4 billion, versus $906.4 billion three months earlier.
Using the rounded balances, our calculation puts capital growth at about 0.3% and risk-weighted-asset growth at about 1.8%. Dividing each capital balance by its corresponding asset measure gives approximately the reported ratios.
The arithmetic explains how the two observations can coexist: a modest increase in capital can accompany a lower ratio when the denominator expands faster. It does not identify the cause of every change inside either balance.
Read the movement explanation next
HSBC attributes the ratio's movement to higher risk-weighted assets, debt-security valuation changes and its previously announced buyback, partly offset by capital generation from regulatory profits after dividends. These are the bank's explanations, rather than an independent assessment of its capital adequacy.
The reported ratio is a net result. Focusing only on capital generation would omit the other movements; focusing only on the lower ratio would miss the increase in the capital balance.
For shareholders, the useful follow-up is how both sides evolve in subsequent disclosures. Risk-weighted assets are not interchangeable with total assets, and regulatory capital is not a cash account available for withdrawal. Neither this comparison nor a rounded ratio establishes a precise amount available for distributions.
This quarter's figures describe an actual September-to-June comparison. They do not forecast the next ratio or establish that HSBC has breached a regulatory requirement.