Big Aussie banks may need A$48b to guard against crisis risks

Sydney

MAJOR Australian banks will need as much as A$48 billion (S$52.8 billion) to move to the top quartile of global banks, analysts estimate, after a government-backed review on Sunday called for stronger capital levels to ensure they can survive a global financial crisis.

While the review fell short of specifying the extent of the increase needed, it said capital levels at Australian banks needed to rise to 12.2 per cent to be in the top quartile of international banks, from current levels of 10-11.6 per cent.

Bell Potter Securities analyst TS Lim said each bank would need A$10-12 billion to make it to the top quartile. The Australian Prudential Regulatory Authority (APRA) will take a final call on the capital charge for banks in a consultative process until March 31 next year.

"Overall, Murray's recommendations around capital, while not entirely surprising, are a negative for the major banks," said Omkar Joshi, an investment analyst who helps oversee about A$1 billion at Watermark Funds Management Pty, on Sunday. "I would expect bank shares to underperform the market on Monday." The review was chaired by David Murray, former head of Commonwealth Bank of Australia.

In a note last month, credit rating agency Fitch Ratings estimated the Big Four could face a capital shortfall of up to A$53 billion in the most aggressive scenario. While the numbers are large, Fitch said the banks were "well positioned" to meet the additional buffers through internal capital generation.

Australia's "Big Four" lenders - Commonwealth Bank of Australia, Westpac Banking Corp, Australia & New Zealand Banking Group, and National Australia Bank - hold a combined market share of more than 80 percent, raising fears that they are "too big to fail".

They survived the global financial crisis that began in 2008 relatively unscathed and have been generating record profits in recent years, largely on the back of massive mortgage books.

Mr Murray said in his report the major banks would be rendered insolvent in the absence of capital raising if they were hit by a shock similar to that which overseas banks suffered during the global crisis. "We agree Australian banks should be unquestionably strong and that APRA is the right organisation to assess where banks are placed globally and appropriate capital levels," ANZ said in an emailed statement.

Mr Murray also proposed lifting so-called risk weights on mortgages for major banks, which could hit profitability or lead to higher home loan rates. "These crises impose massive costs on economies and societies, and the circumstances that assisted us during the recent global financial crisis will not be present in future crises," he said at a news conference.

The first major review of the financial system since 1997 also recommended raising funding for regulators and reducing disclosure requirements for large listed corporates issuing "simple bonds" to boost the retail corporate debt market.

It found that the country's A$1.8 trillion compulsory superannuation industry, or pension industry, was inefficient due to a lack of competition and was failing to deliver expected benefits due to high costs. REUTERS