Aussie banks likely to take dividend hit from tougher NZ capital rules

Wellington

AUSTRALIA'S major banks are facing pain on a new front, as New Zealand's announcement on Thursday of tougher capital requirements is expected to hit already-weakening dividend payout ratios.

The four Australian banks that dominate the New Zealand market will need to find as much as NZ$20 billion (S$17.8 billion) to meet the higher capital levels, but were granted more time than anticipated to do so by the central bank.

The Reserve Bank of New Zealand (RBNZ) said raising the total capital ratio minimum to 18 per cent for the big four, and to 16 per cent for smaller banks was necessary to better enable the country to weather economic turbulence. The current minimum requirement is 10.5 per cent.

For high-quality Tier 1 deposits, the minimum ratio for the top four banks almost doubles to 16 per cent, while smaller banks will be required to hold 14 per cent.

The changes will be phased in over a seven-year period from July 2020, rather than the five years originally proposed. Banks will also be allowed to raise capital by issuing cheaper redeemable preference shares, rather than be restricted to common equity.

Jeffries analyst Brian Johnson said the new regime was marginally better than anticipated, but will "crimp the banks ability to stream capital from New Zealand back to Australia, especially for ANZ".

"The big implication from these changes will be on the sector's dividend payout ratios."

The big four Australian banks - Australia and New Zealand Banking Group (ANZ), Commonwealth Bank of Australia (CBA), National Australia Bank (NAB) and Westpac Banking - earn a sizeable share of their profits from across the Tasman Sea.

ANZ, the biggest of the quartet, garnered 22 per cent of its group profit from New Zealand in 2019, according to its annual report.

Australian lenders are already under pressure back home amid the fallout of a government-backed inquiry last year that found widespread misconduct in the financial sector.

Westpac, NAB and ANZ all cut their final dividends or reduced their franking credits this financial year to prepare for the RBNZ's changes and a move by Australian regulators to reduce the amount of Tier 1 capital banks can hold against their international operations. CBA will announce its interim dividend in February.

ANZ chief executive Shayne Elliott said "while the increased capital requirements remain significant ... we are confident we can meet the higher requirements without the need to raise additional capital".

ANZ said the net impact was an increase in Tier 1 capital of A$3 billion (S$2.8 billion) by July 2027, which includes a A$1 billion management buffer. It added that the impact was net of NZ$1.5 billion of profits it had retained in 2019 in anticipation of the higher requirements.

T. S. Lim, an analyst at Bell Potter, said the longer transition period provided some much needed breathing room, but also noted the impact on dividends.

"I think the banks should have enough capital to cope with the changes, all they need to do is reduce the dividend flow from New Zealand back to Australia and that will get them across the line," the analyst said.

Shares in CBA, NAB and Westpac rose by between 0.9 per cent and 1.9 per cent after the announcement. ANZ was in a trading halt to consider the changes.

The New Zealand dollar rose 0.3 per cent, as the long lead time was seen as less of a drag on the economy than had been expected, which in turn reduced expectations of deeper monetary easing to offset any negative effects.

The RBNZ said in its statement that once fully implemented, the changes could lead to around a 20 basis point increase in average lending rates.

RBNZ Governor Adrian Orr said he did not expect the changes to have a major impact on monetary policy, but they would protect the economy.

"Something people often forget is near misses," he said at a press conference. "It's the near misses or the bail outs that can be very expensive, but never really picked up." REUTERS