Australian Investors Sell Bank Stocks Before Capital Rules

Australian investors cut their stock holdings in the nation’s three largest banks to a six-month low in May as new capital rules diminish the likelihood of increased dividends.

Domestic institutional and individual shareholders trimmed their stakes in Commonwealth Bank of Australia, National Australia Bank Ltd. and Westpac Banking Corp. by a mean of 4.5 percentage points this year through June 3, taking their average holding in the three to 47 percent, data compiled by Bloomberg show. NAB, with the lowest loan margins of the three, was reduced the most by 6.2 percentage points, the data show.

Local investors are selling the banks’ shares, which account for about a quarter of the benchmark S&P/ASX 200 Index, as concern their rallies to record highs had outrun prospects for higher dividends and a mortgage-lending recovery. The Australian regulator outlined additional capital requirements in the past six months to comply with global Basel regulations.

“The story for the banks is not as positive as it was before,” said Shane Oliver, who oversees about $133 billion as Sydney-based head of investment strategy at AMP Capital Investors Ltd. “It does make sense to have a decent exposure to the banks, but not at the same level as before. As time goes by, it’s going to be difficult to increase the dividends because of the capital adequacy ratio.”

AMP, Australia’s largest publicly traded fund manager, lowered its bank holdings to a neutral position since late last year, Oliver said, meaning the firm now holds about the same amount of stock as is represented in benchmark indexes. His firm was previously overweight.

Rally Fades

Shares of CBA, Westpac and NAB lost at least 0.2 percent at the close in Sydney, compared with the S&P/ASX 200 Index’s 0.1 percent drop. Australia & New Zealand Banking Group Ltd., the country’s fourth-biggest bank by assets, slid 0.5 percent.

The S&P/ASX 200 Banks Index surged 29 percent last year, the most since 2009, as speculation rose record profits would allow lenders to bolster dividend yields that are already the highest in the developed world, data compiled by Bloomberg show.

The stock gauge’s gains eased to 2.7 percent this year through yesterday after the Australian Prudential Regulation Authority told the biggest banks on Dec. 23 to carry an extra 1 percent of core Tier 1 capital from Jan. 1, 2016, due to their systemically important status.

More Capital

APRA will phase out by December 2017 any capital benefits derived from debt issued by the lenders’ wealth-management units, according to May 5 statements from the banks. By then, the banks will need to convert certain debt held by the subsidiaries into equity in the businesses, resulting in the need to add more capital.

Australians owned 37.3 percent of NAB, saddled with a U.K. business that has dragged on profitability, as of June 3, down from 43.5 percent at the end of last year, data compiled by Bloomberg show. They cut holdings of CBA, which reached a record on June 2, by 2.1 percentage points this year and lowered Westpac by 5.1 percentage points, the data show.

Some of those shares are being bought by U.S. investors still lured by the average 5.2 percent dividend yield offered by CBA, NAB and Westpac. While that yield is down from 7.1 percent at the end of the lenders’ 2008 business years, it’s above the 3.6 percent paid out by the largest Canadian banks, and 1.5 percent in the U.S., the data show.

American investors increased their holdings in the three Australian banks by a mean of 4.5 percent this year, according to the data. U.S. shareholders owned 27 percent of the three companies on average, the data show.

Dividend Scrutiny

“The world is so yield hungry, and when you can get a 5 percent yield that’s safe and secure, that will support the equity for some time,” Wendell Perkins, a fund manager specializing in international equities at Manulife Asset Management Ltd., said by phone from Chicago. “The downside risk is more related to if things turn to the point that the dividend comes under scrutiny. We’re not at that point.”

His firm manages about C$298 billion ($273 billion) of assets and owns NAB shares.

CBA, the nation’s largest mortgage lender, raised its dividend payout on Feb. 12. ANZ followed suit on May 1. Both lenders’ shares rallied more than 15 percent in the past year.

Prospects for higher payouts helped drive stock valuations for CBA, NAB and Westpac to an average 2.2 times net assets on May 29, the highest level since September 2007, data compiled by Bloomberg show. The three companies are the nation’s largest lenders by assets.

Capital Management

The APRA rule change unveiled last month would hurt CBA and NAB the most, dragging down their minimum common Tier 1 capital ratio by 66 and 53 basis points respectively, CIMB Group Holdings Bhd. analysts led by John Buonaccorsi wrote in a May 5 note. Westpac will be unaffected because it already complies with the rules, they said.

APRA requires banks to maintain a minimum Tier 1 ratio, a measure of a lender’s ability to absorb future losses, of 8 percent from January 2016. ANZ had a level of 8.3 percent at March 31 under APRA standards, according to a regulatory filing. NAB was at 8.64 percent, compared with Westpac’s 8.8 percent and CBA’s 8.5 percent.

The rule changes will “drive a reassessment of sustainable returns and capital management capacity,” the CIMB analysts wrote.

Retained Earnings

Spokesmen for the four banks declined to comment beyond their most recent filings or public statements. NAB, CBA and ANZ said May 5 they expect to meet the new rules through retained profits. Westpac Chief Executive Officer Gail Kelly said the same day the lender plans to set a target range for its Tier 1 capital ratio by September.

Australian investors increased their holdings of ANZ shares by 12.4 percentage points in the past two weeks after its valuation fell to a three-month low of 1.9 times net assets.

“There are opportunities in cost reduction, and bad and doubtful debts aren’t going to materially change,” said Paul Xiradis, who helps oversee about $9 billion as chief executive officer of Sydney-based Ausbil Dexia Ltd. “The question is, will they be able to grow earnings in the next little while?”

Before it's here, it's on the Bloomberg Terminal.