Australia’s biggest banks this week announced the largest collective fundraising since the global financial crisis. They may just be getting started.
National Australia Bank Ltd., Westpac Banking Corp. and Australian & New Zealand Banking Group Ltd. revealed proposals to raise a combined A$8 billion ($6.4 billion) in capital to bolster their reserves against potential mortgage losses at home and to meet tougher global standards.
While the value of mortgages at the nation’s biggest banks has more than doubled since 2008, boosting profits, the banks have lowered their assessment of risks related to home loans.
Regulators indicated in March they want to reverse this trend. They have also said they may impose extra capital requirements on some lenders to contain risks from a housing boom that has boosted prices in Sydney by 40 percent in the past three years.
“Banks are beginning to shore up their capital positions and it will be a continuous theme as earnings growth slows down,” said Simon Burge, who oversees A$450 million including bank shares as chief investment officer at Above the Index Asset Management Pty.
The capital plans announced this week have put Australian bank shares on course for the biggest weekly slump in almost two years. NAB is seeking A$5.5 billion in the country’s biggest rights issue, while Westpac is raising A$2 billion. ANZ may garner as much as A$480 million.
More capital raisings are likely if regulators follow up on proposals to require the banks to set aside more capital against potential mortgage losses, and force them to lift capital ratios to higher global standards. The largest banks would need to raise up to an additional A$30 billion if those measures are imposed in full, CIMB Group Holdings Bhd. estimated in December.
While Commonwealth Bank of Australia didn’t announce any capital raising, Burge said the nation’s largest lender by market value may have to follow suit. A spokesman for Commonwealth Bank declined to comment.
At the same time, the largest banks may see a slowdown in their earnings, which have been hitting successive records over the past five years, due to shrinking interest margins and rising charges for bad debts.
For the lenders, “with slower earnings growth, their ability to generate organic capital diminishes,” Burge said.
National Australia, ANZ and Westpac reported this week combined first-half cash profit of A$10.8 billion as their bad debt expenses climbed a combined 17 percent from six months earlier, filings show. Commonwealth Bank of Australia’s business year ends in June rather than in September for its three competitors.
Profits had benefited from declining mortgage rates, which have encouraged Australians to borrow more for property purchases. The four largest lenders have more than doubled the value of their mortgages to A$1.12 trillion in the seven years through March, data from the Australian Prudential Regulation Authority show.
Mortgages on average made up half of the four banks’ total advances as of their latest business years, filings show. Meanwhile, the banks have been reducing the risk weightings they assign to their mortgage books, lowering the amount of capital they need to set aside.
The average risk weight on mortgages for the four biggest lenders was at 17 percent as of March, lower than the 18 percent they had in 2008, a Bloomberg calculation based on filings by the banks show.
“Mortgage risk weights have played a big role in the major banks’ ability to increase their exposure to mortgages over the past few years,” said Omkar Joshi, who helps oversee A$1 billion as an investment analyst at Watermark Funds Management in Sydney. “Their ability to lend in this segment is just a factor of reducing the risk weights.”
The four largest lenders have also been helped by their ability to use in-house models to determine mortgage risk, a more flexible process than their smaller competitors which have to use a standardised approach that reflects general risks across asset classes.
In December, a government inquiry recommended that the four largest lenders should increase their mortgage risk weightings to 25 percent to 30 percent, which would require more reserves to cover the increased risk.
APRA, the country’s financial regulator, hasn’t said which of the FSI recommendations it will adopt or when it will introduce them. But APRA Chairman Wayne Byres urged banks last month to deal with the recommendations on mortgage risk weights “sooner rather than later.”
The capital raisings announced this week already amount to the most in any year since 2008, when the four lenders amassed almost A$13 billion in the wake of the global financial crisis, data compiled by Bloomberg show.
Australian banks are also expecting stricter global capital standards, NAB Chief Executive Officer Andrew Thorburn said on Thursday. The Basel Committee on Banking Supervision is considering draft plans unveiled in December that include tougher controls over how lenders measure risk.
“Every banker around the world knows that the capital question and requirement is going up,” Thorburn said.