Capital Controls Another Knock To Banks

Australia | Sep 03 2019

Brokers decide new prudential capital controls may limits growth for banks and curb dividends.

-ANZ, Westpac and NAB face $500m capital add-ons
-ANZ to be hardest hit by capital ratio changes to APS 222
-Big banks may be forced to cut dividends and reprice loans
-Brokers mixed on outlook for big banks

By Nicki Bourlioufas

It's not over for the big banks in meeting potentially onerous capital requirements. The banking regulator APRA is requiring further changes to capital ratios and some of the big banks are better placed than other to meet them, according to analysts.

APRA has ordered Westpac ((WBC)), ANZ Bank ((ANZ)) and National Australia Bank ((NAB)) to put aside additional capital in response to the self-assessments of their risk management and governance.

The ‘add-on' capital requirement will apply until the banks strengthen risk management and address flaws identified in their self-assessments, which follow the APRA-initiated Prudential Inquiry into the Commonwealth Bank of Australia ((CBA)). That has seen the CBA required to hold a $1bn add-ons since April 2018.

According to UBS, these add-on requirements will lead to a 16 to 18 basis point drop in Common Equity Tier 1 (CET1) capital for the banks. As part of the Basel III reforms to the capital framework introduced in 2013, APRA requires ADIs (authorised deposit-taking institution ) to hold a buffer of CET1 capital, over and above each ADI's minimum requirement.

Contagion risk control

On top of these ‘add-on' capital controls, APRA recently released its revised version of Prudential Standard APS 222, Associations with Related Entities. The updated standard is designed to further reduce the risk that problems in one part of an authorised deposit-taking institution having a "detrimental impact" on the overall group.

APRA has confirmed that it will implement its previously announced proposal for ADIs to limit exposures to related entities (including offshore units) to 25% of Level 1 Tier 1 Capital, down from 50%.

The changes take effect from January 2021. By updating and strengthening the requirements of APS 222, APRA wants to ensure ADIs are better able to monitor and control contagion risk.

The practical implication of the revised APS 222 is that the big banks will now have caps on the amount of capital that can be injected into their NZ operations. ANZ Bank, with the largest NZ exposure, is the most impacted, according to brokers.

The bank has already disclosed that it is approaching the 25% cap on current metrics ahead of the Jan 2021 implementation.

ANZ on the radar

UBS believes ANZ Bank dividend payouts will come under pressure. "The vast majority of earnings for dividends would need to come from Australia and not NZ, placing pressure on group dividends."

JP Morgan is even more downbeat. Following changes to APS 222, the broker says it has downgraded its FY20 cash earnings per share (EPS) EPS forecasts for ANZ by -0.7% and FY21 cash EPS forecast by -2.7% and also stripped dividend growth from its forecasts.

ANZ's price target has been reduced -0.4% to $27.70. JP Morgan expects no buybacks or discounts on dividend reinvestment plans (DRP) to ensure ANZ has enough capital to meet the RBNZ's forthcoming capital rules and to prevent it from breaching APS 222's 25% limit.

The banking research team at Macquarie says APRA's capital requirements are "penal" for ANZ. "We continue to believe that APRA will look to minimise the capital outflow, leaving the door open for future changes relating to NZ. Despite relative valuation attractiveness, we remain cautious on ANZ given uncertainty around NZ capital outcomes," the broker says.

Ord Minnett predicts ANZ is likely to try mitigate the impact of these changes by possibly making greater use of its NZ branches, writing more loans through the branch structure rather than the NZ subsidiary.

ANZ could also constrain growth capital allocated to the NZ unit. A potential sale of ANZ's NZ unit would need to be weighed up against the likely increase in funding costs for an independently listed NZ business against the cost of holding stranded group capital.

UBS says the banks are looking at a number of options to reduce the burden of the NZ capital proposals. "Writing loans out of the Australian branch rather than NZ business units is one option. However, it is only really effective for institutional business. Shrinking the balance sheet and repricing are also options which could be undertaken."


The full story is for FNArena subscribers only. To read the full story plus enjoy a free two-week trial to our service SIGN UP HERE

If you already had your free trial, why not join as a paying subscriber? CLICK HERE

MEMBER LOGIN