Australia Banks Hit With Tougher Tier-1 Capital Requirements

Australia’s biggest banks will have to hold more capital under fresh guidelines from the prudential regulator aimed at ensuring the institutions are “unquestionably strong.’’

The four major banks -- Australia & New Zealand Banking Group Ltd., Commonwealth Bank of Australia, Westpac Banking Corp., and National Australia Bank Ltd. -- will need to have 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 in 2016 was 9.85 percent, according to Morgan Stanley calculations.

APRA expects the four major banks will have to increase capital ratios by about 100 basis points above their December 2016 levels. Other banks using standardized models to assess risk will see minimum requirements increase by about 50 basis points.

“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.”

Shares in the big four bank shares rose in early Sydney trading. ANZ Bank gained as much as 3.4 percent, Commonwealth Bank rose 2.9 percent, National Australia Bank added 3 percent and Westpac was up as much as 3.4 percent.

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.

‘Unquestionably Strong’

The decision marks a further ratcheting up 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. 

“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.

APRA said it “encourages” the banks to consider raising their capital benchmarks more quickly than the formal deadline.

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

Higher levels of equity would be needed if the regulator later decides to increase mortgage risk weightings. APRA said it intends to release a discussion paper later this year addressing “the structural concentration of exposures to residential mortgages.”

Home loans account for more than 60 percent of domestic bank lending in Australia and the regulator has grown concerned that existing capital rules do not 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.

“There’s a twist to today’s announcement,” said David Walker, a money manager at Clime Asset Management in Sydney. “The four majors are already there or close with their ratios to APRA’s requirements. But if APRA increases risk weights for mortgages later in the year -- and I suspect they’ll do so -- it will make it harder for the banks. They’re going to have further to go than what we’ve seen today for their capital requirements.” 


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Author:Emily Cadman