Australia's Big Banks Rally on `Benign' New Capital Rules

  • Big four banks face 100 basis-point increase in Tier-1 capital
  • APRA sets new level for banks to be ‘unquestionably strong’

Australia Banks Hit With Tougher Capital Requirements

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Australia’s big four banks rallied in Sydney trading as new capital requirements turned out to be less onerous than expected and the financial regulator signaled they may not get any higher.

To ensure they are “unquestionably strong,” Australia & New Zealand Banking Group Ltd., Commonwealth Bank of Australia, National Australia Bank Ltd. and Westpac Banking Corp. will need Tier-1 capital ratios of at least 10.5 percent by Jan. 1, 2020, the Australian Prudential Regulatory Authority said in a statement Wednesday.

The average across the banks at the end of last year was 9.85 percent, according to Morgan Stanley calculations, putting the lenders within close reach of the new target.

“The new requirements look relatively benign,” said Anthony Ip, a credit analyst at Citigroup Inc. “The majors may well be able to meet the new requirements organically without equity raisings, assets sales or changes to dividends.”

ANZ Bank shares rose as much as 4.2 percent, the most in more than eight months, and Commonwealth Bank added 3.4 percent. National Australia Bank rallied as much as 3.7 percent and Westpac climbed as much as 4 percent.

Adding to the sense of relief, APRA said in an accompanying information paper that likely subsequent changes necessitated by international agreements can be accommodated within this framework and “will not necessitate further increases to requirements at a later date.”

Mortgage Risks

Later this year, the regulator will outline how it intends to build on the revised Basel III framework to address the “structural concentration” of exposure to residential mortgages. “The design of these measures will seek to target higher risk lending,” it said.

Home loans account for more than 60 percent of domestic bank lending in Australia and the regulator has grown concerned that existing capital rules don’t reflect this concentration of lending and risk. Property prices in the country’s biggest cities have soared in recent years, stoking fears of a house price bubble.

APRA said it expects the big four banks will have to increase capital ratios by about 100 basis points above their December 2016 levels. Smaller banks will see their minimum requirements increase by about 50 basis points. The new target will put Australia’s banks in the top 25 percent globally, APRA said.

The major banks will probably end up with capital ratios around 10.75 percent to 11 percent because the regulator would expect them to operate above the 10.5 percent minimum, UBS Group AG analyst Jonathan Mott wrote in a note to clients.

Commonwealth Bank faces a capital shortfall of A$2.6 billion ($2.1 billion) under the new guidelines, while National Australia Bank is A$1.9 billion short, according to Morgan Stanley analysis released before APRA’s announcement. Westpac needs A$700 million of fresh capital, while ANZ Bank has a A$1.4 billion surplus, Morgan Stanley said.

The decision to raise capital requirements is the latest element of regulatory efforts to ensure the country’s large lenders can weather any downturn, particularly in the property market. In 2015, the big banks collectively raised A$20 billion in new capital after the regulator increased the amount banks had to hold against potential home-loan losses. This year APRA has also introduced new restrictions to limit the proportion of new interest-only loans issued.

‘Unquestionably Strong’

“APRA’s objective in establishing unquestionably strong capital requirements is to establish a banking system that can readily withstand periods of adversity without jeopardizing its core function of financial intermediation for the Australian community,” Chairman Wayne Byres said in a statement.

The regulator will decide separately whether to introduce a new class of capital to absorb losses and avoid taxpayer-funded bailouts in the event of a repeat of the global financial crisis, as has been implemented in Europe and the U.S.

APRA said it “encourages” lenders to consider raising their capital benchmarks more quickly than the formal deadline. All the banks said they were well placed to meet the new requirements.

The lenders have been strengthening their capital positions ahead of the APRA announcement, mainly by shedding riskier assets, according to Deutsche Bank AG. “The banks have given themselves a good head start,” analyst Andrew Triggs wrote in a May 12 note.

— With assistance by Ruth Liew

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