Australia Sets Higher Capital Buffer for Four Biggest Banks

Australia’s four largest banks will need to carry an extra 1 percent of core tier 1 capital from Jan. 1, 2016, due to their systemically important status, according to the country’s banking regulator.

Australia & New Zealand Banking Group Ltd., Commonwealth Bank of Australia, National Australia Bank Ltd. and Westpac Banking Corp. need to have a greater capacity to absorb losses, the Australian Prudential Regulation Authority said in a statement today.

The nomination of domestic systemically important banks, or D-SIBs, is part of Basel III rules to deal with any threat to domestic and regional financial stability. APRA expects the lenders will have sufficient capital to meet the new rules by 2016 and said the 1 percent higher loss absorbency rate is at the lower end of rates applied elsewhere in the world.

“While we don’t expect equity raisings, we expect banks will again need to rely on dividend reinvestment plans to meet higher capital requirements,” Victor German, a Sydney-based analyst at Nomura Holdings Inc., said in an e-mail, referring to discounted stock offered by banks to encourage investors to accept shares in place of dividends.

Shares of ANZ advanced 0.5 percent while CBA, Westpac and NAB gained 1.1 percent. The benchmark S&P/ASX 200 Index rose 0.5 percent.

Capital Buffer

The new capital impost will take the big four Australian banks’ minimum common equity tier 1 capital requirement to 8 percent, in line with current capital levels at the lenders, according to their annual reports.

The banks have generally carried a capital buffer above the minimum requirement, and would likely aim to have a core tier 1 ratio of between 8.75 percent to 9.5 percent once the new rule is applied, German said. That would result in a combined capital shortfall of about A$5.9 billion ($5.3 billion) among the big four banks, German estimated.

“This will dilute earnings per share by as much as 2 percent and the sustainable dividend payout ratio could be reduced by 1 to 2 percent,” German said.

Basel III rules are aimed at bolstering banks’ liquidity and capital to prevent a repeat of the crisis that deepened with the collapse of Lehman Brothers Holdings Inc. in 2008. Under D-SIB rules, national authorities have leeway to determine which banks should be considered important and the level of additional capital charges to be applied to these banks to minimize their risk of failure.

No Phase-In

While Australian lenders stayed profitable and didn’t require bailouts during the financial crisis, APRA has followed a tighter timetable without phase-ins to impose the new rules. It again said today it didn’t see a need to spread the introduction of the new capital requirement over a few years.

NAB said in response to APRA’s announcement that it “has a strong capital position and expects to be able to meet the revised capital requirements through organic capital generation.” It may opt to lean on its dividend reinvestment plan if needed, the lender said in a statement.

Westpac was well placed to meet the new requirements and will review its preferred capital levels in 2014, the lender said in a statement today. CBA’s current capital position is already in excess of APRA’s requirements, the lender said in a statement today.

ANZ’s current capital position is already in excess of APRA’s requirements, the bank said in a statement.

“Over time and through organic capital generation, ANZ may modestly increase its capital buffers from current levels,” it said.

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