[Weekend Money] "Banks Can Also Lend for AI Investments": Which U.S. Stocks Benefit from Capital Regulation Easing?

Bank Capital Regulation Eased, AI Investments Rising
Citigroup, Wells Fargo, BoA, and PNC in the Spotlight

"Banks Can Also Lend for Artificial Intelligence (AI) Investments."

As the easing of banking capital regulations in the United States gathers pace, companies’ demand for funding to expand AI investments is increasingly expected to be met through bank lending. Citigroup, Wells Fargo, Bank of America (BoA), and PNC Financial are cited as key beneficiaries of this regulatory relaxation.

Hanwha Investment & Securities recently stated this in its report, "Banks Can Also Lend for AI Investments; Beneficiary Stocks from the U.S. Banking Capital Regulation Overhaul."

U.S. banking capital regulations are now entering their most significant phase of relaxation since the 2008 global financial crisis. With the launch of the second Trump Administration, U.S. financial authorities markedly revised and proposed the Basel III Endgame in March, and the final rules are now pending confirmation.

The core of the revision is reducing capital requirements by adjusting how banks calculate risk-weighted assets (RWA). The additional capital requirements for Global Systemically Important Banks (G-SIBs) are being overhauled, and the RWA calculation method for the standardized approach is also set to be updated. Considering the leverage ratio revision already implemented and the finalization of stress test reforms scheduled soon, the degree of U.S. banking capital regulation easing is evaluated as being clearer than that of major jurisdictions like Europe, the UK, and Japan.

In particular, banks with higher proportions of corporate and household loans are expected to benefit more from the regulatory relaxation. Hanwha Investment & Securities researcher Park Jein, who authored the report, explained, "Under the Basel III Endgame, the introduction of a new formula for market risk RWA could increase the burden," adding, "However, the effects of regulatory easing will be more directly felt among banks focused on corporate and household lending than those with higher trading businesses."

As a result, the report highlighted Citigroup, Wells Fargo, BoA, and PNC Financial as preferred stocks for investors. He noted, "Citigroup, Wells Fargo, and BoA are all classified as G-SIBs, so the reduction in Common Equity Tier 1 (CET1) capital as estimated by the Federal Reserve is lower than that for Category III or IV banks," but pointed out, "Their sheer size of operations and customer base are overwhelming, and they will also benefit from the revision of G-SIB additional capital requirements."

These banks, compared to capital markets-focused banks like Goldman Sachs or Morgan Stanley, have lower exposure to market risk RWA and higher proportions of net interest income and traditional lending. They already have the business foundation to convert the capital secured through regulatory easing into genuine loan growth and profit increase.

The report further highlighted PNC Financial among non-G-SIBs for its high potential to benefit. This is because Category III banks are expected to see greater capital relief compared to large G-SIBs, and at the same time have larger assets and corporate client bases than Category IV and mid-to-small-sized banks with less than 100 billion dollars in assets.

Researcher Park commented, "With high proportions of mortgage and commercial lending, PNC stands to benefit more from the easing of risk weights for residential mortgages under the standard approach revision," adding, "It is an institution with the scale and business structure to translate capital secured through regulatory changes into expanded new lending." He also analyzed that, even if the Expanded Risk-Based Approach (ERBA) is selected, the combination of low market risk exposure and improvement in risk weights for quality corporate loans would be favorable for the bank.

Furthermore, the report emphasized the increasing external funding needs of corporations as the AI investment cycle extends, amid the expanded capacity of banks to provide capital. Recently, large-scale information technology companies (Big Tech) have been diversifying funding sources while continuing to issue significant amounts of corporate bonds.

In August, Nvidia announced the construction of an AI computing infrastructure financial platform with financial institutions such as Apollo, BlackRock, and Blackstone. This structure pools capital from financial institutions to provide large-scale investment funding for Nvidia customers’ GPU purchases and data center construction. It demonstrates how corporate financing for AI investments is diversifying from being centered on internal cash and corporate bonds to including bank lending and investments.

Meanwhile, demand for bank loans is also recovering. According to the Federal Reserve's April survey of bank loan officers, the net ratio of banks reporting an increase in loan demand from large and mid-sized companies turned positive again, exceeding the 10-year average.

Researcher Park stressed, "With growing funding demand and the increased supply capacity of bank capital coinciding, growth opportunities in the U.S. corporate lending market will emerge." He forecasted, "Banks burdened less by RWA as a result of regulatory relaxation can supply more credit with the same amount of capital. The G-SIBs of Citigroup, Wells Fargo, and BoA, with their large corporate client bases and lending franchises, as well as Category III PNC, which stands to benefit greatly from regulatory changes and increased credit demand, will be the main beneficiaries."

Meanwhile, the final rules for Basel III in the U.S. will be confirmed through regulatory procedures by the Federal Reserve, the Office of the Comptroller of the Currency (OCC), and the Federal Deposit Insurance Corporation (FDIC). As this does not require separate legislation by Congress, major policy directions are unlikely to be changed even if the balance of power in Congress shifts during the midterm elections in November. However, if the Democratic Party's influence in Congress grows, political pressure and oversight over regulatory authorities could increase. Fed Governor for Supervision Michelle Bowman has previously stated that she hopes the process will be finalized within the year.

This content was produced with the assistance of AI translation services.