COMMONWEALTH Bank of Australia (Commonwealth Bank) and its three main competitors may need as much as A$30 billion (US$25 billion) after a government-commissioned inquiry called for ‘unquestionably strong’ capital levels, analysts said.
The shortfall is based on lenders needing to boost levels to within the top quartile of their global peers and set aside additional funds against potential losses on home mortgages, as recommended by the Financial Systems Inquiry report released in Sydney by Treasurer Joe Hockey.
Australia’s major lenders hold about 10 per cent to 11.6 per cent of their assets asTier 1 capital compared with at least 12.2 per cent at the world’s safest banks, the government’s first inquiry into the financial system since 1997 said. Given banks’ reliance on overseas investors for debt funding, the financial system must be robust, the report said,
“The onus on capital is in line with global changes and Australia has to fall in line,” John Buonaccorsi, a Sydney-based analyst at CIMB Group Holdings Bhd said in a phone interview after the report was released.
“I don’t expect a straight capital raising yet.”
Australia’s largest banks are initially more likely to resort to dividend reinvestment plans, where investors swap all or part of their dividend for new shares, and limiting increases in payout ratios, he added.
Buonaccorsi expects a shortfall between A$25 billion and A$30 billion. Omkar Joshi, who helps oversee A$1 billion as an investment analyst at Watermark Funds Management (Watermark), estimated a A$15 billion to A$20 billion gap.
Their predictions were based on an average mortgage risk weight of 25 per cent to 30 per cent and systemically important bank buffer of two per cent.
The inquiry led by former Commonwealth Bank head David Murray said policies must be tuned to reduce the cost of failure by ensuring lenders have sufficient loss-absorbing capacity.
Australia’s government will consult widely with consumers and industry on the report, which contained 44 recommendations aimed at bolstering the nation’s financial sector, Hockey said after its release.
It will seek bipartisan political support when taking decisions on the review, which will probably be after the first quarter of 2015, he said.
“I have long stated that our banks must be well capitalised and they are,” Hockey told reporters in Sydney.
“What the Murray inquiry is recommending is a further look at increasing those levels of capital and that’s something that needs to be dealt with appropriately by the regulators.”
The inquiry received more than 6,800 submissions and met with over 50 financial institutions, market participants and regulators from the US, Europe, UK, Asia and New Zealand.
The nation’s four largest lenders – Commonwealth Bank, Australia & New Zealand Banking Corp (ANZ), National Australia Bank Ltd (National Australia) and Westpac Banking Corp (Westpac) – added A$34.6 billion in common equity Tier 1 capital from October 2010 to September this year as they boasted five straight years of record profits, filings show.
The banks raised A$17.7 billion through share sales in 2008 and 2009 to bolster their balance sheets in the wake of the global financial crisis, data compiled by Bloomberg show.
“Murray’s recommendations around capital, while not entirely surprising, are a negative for the major banks and incrementally positive for the regional lenders,” Watermark’s Joshi said.
“However, it is interesting to note that Murray has left the final decision with the regulator rather than making an actual recommendation on a particular capital ratio.”
Commonwealth Bank and National Australia said they would now consider the recommendations, in e-mailed statements. ANZ’s deputy chief executive officer (CEO) Graham Hodges said increasing mortgage weights for major banks was at odds with the Basel committee’s risk-based approach.
“We believe we are strongly capitalised,” Westpac’s deputy CEO Phil Coffey said in an e-mailed statement.
“As the FSI panel noted, comparing capital levels with global peers is a complex issue and we will be consulting with the Australian Prudential Regulation Authority (APRA) on defining fact-based international capital comparators.”
Four regional lenders – Suncorp Group Ltd, Bendigo & Adelaide Bank Ltd, Bank of Queensland Ltd and ME Bank – said in a statement the recommendations would create a more level playing field with the larger banks by closing the gap in risk-weighting of mortgages.
The panel recommended a mortgage risk weighting of 25 to 30 per cent. The four biggest lenders have an average mortgage risk weighting of 18 per cent, UBS analysts led by Jonathan Mott said in a September 8 note. — Bloomberg