Australian banks need extra NZ$13b to meet tougher New Zealand capital rules

[WELLINGTON] Australia's major banks shrugged off concerns about further weakness in dividend payout ratios and earnings downgrades after New Zealand announced tougher capital requirements on Thursday.

The four Australian banks that dominate the New Zealand market said they will need a combined extra NZ$13 billion (S$11.6 billion) to meet the new requirements, significantly less than the NZ$20 billion that had been forecast. They were also granted two years longer than anticipated to reach the higher ratios.

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 level of bank capital adopted by New Zealand is more stringent than other countries, but not extreme, and was necessary to protect the country against a one in 200 year big bank failure, the RBNZ said.

In Australia the Tier 1 minimum capital requirement for the big four banks - Australia and New Zealand Banking Group (ANZ), Commonwealth Bank of Australia (CBA), National Australia Bank (NAB) and Westpac Banking Corp - is 10.5 per cent.

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."

NAB said in a statement that the "ultimate impact" would be dependent on various factors, including "potential mitigating actions undertaken".

CBA said it will consider ways "to minimise the financial impact from the requirements while supporting our customers and growth in the NZ economy".

The RBNZ provided some further relief by announcing that 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.

ANZ led bank shares higher after the announcement on Thursday, rising 2.25 per cent. NAB gained 2.07 per cent, Westpac increased 1.25 per cent and CBA rose 1.07 per cent. The benchmark S&P/ASX200 closed up 1.16 per cent.

However, Moody's Investor Services vice president Daniel Yu said the changes would weigh on the banks' return on equity ratios.

"As such, we expect the new measures will prompt higher lending rates in efforts to boost profitability, as well as constrain growth in more capital-intensive lending," he said.

DIVIDEND IMPLICATIONS

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 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.

UBS analyst Jonathan Mott said: "We expect the earnings downgrade cycle to continue unless the global economy rebounds sharply and yield curves steepen".

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 the changes could lead to around a 20 basis point increase in average lending rates, once fully implemented.

REUTERS