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Australia's big banks rally on 'benign' new capital requirements

[SYDNEY] Shares of Australia's big four banks rallied as new capital requirements aimed at ensuring the lenders are "unquestionably strong" turned out to be less onerous than expected.

Australia & New Zealand Banking Group Ltd, Commonwealth Bank of Australia, National Australia Bank Ltd and Westpac Banking Corp will need to have Tier-1 capital ratios of at least 10.5 per cent 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 per cent, 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 rose as much as 4.1 per cent in Sydney trading, the most in more than eight months, and Commonwealth Bank added 3.2 per cent. National Australia Bank rallied as much as 3.7 per cent and Westpac climbed as much as 3.8 per cent.

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Adding to the sense of relief, APRA didn't announce any immediate changes to the risk weighting of mortgages or the introduction of 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 US.

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 per cent globally, APRA said.

Commonwealth Bank faces a capital shortfall of A$2.6 billion (A$2.82 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 are 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.