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

Sydney

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

Australia & New Zealand Banking Group Ltd (ANZ), Commonwealth Bank of Australia, National Australia Bank Ltd (NAB) and Westpac Banking Corp will need to have Tier-1 capital ratios of at least 10.5 per cent by January 1, 2020, the Australian Prudential Regulatory Authority (APRA) said in a statement on 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.

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 to increase capital ratios by about 100 basis points above their December 2016 levels. Smaller banks will have 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 (S$2.8 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 is 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.

"APRA's objective in establishing unquestionably strong capital requirements is to set up a banking system that can readily withstand periods of adversity without jeopardising 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. All the banks said they were well placed to meet the new requirements.

The banks have been strengthening their capital positions ahead of the APRA announcement, mainly by shedding riskier assets, according to Deutsche Bank.

"The banks have given themselves a good head start," analyst Andrew Triggs wrote in a May 12 note.

The outstanding question for the banks is whether the regulator later decides to increase mortgage risk weightings or take other measures to guard against vulnerability to home-loan defaults. 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 per cent 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 have seen today for their capital requirements." BLOOMBERG