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Australian Regulator Lifts Capital Target for Banks -- Update

19 Jul 2017 4:45 am
By Robb M. Stewart 

MELBOURNE, Australia--Australia's biggest banks face having to hold billions of dollars more in capital after the industry regulator on Wednesday ratcheted up minimum requirements to ensure lenders meet an "unquestionably strong" benchmark and can withstand future crises.

The regulator has given the banks more than two years to achieve the new target, which is relatively modest when measured against the lenders' profitability and efforts in recent years to lift capital buffers in anticipation of further changes. Each of the banks said it is well placed to meet the requirements.

It is the second time since 2015 that the Australian Prudential Regulatory Authority has ordered banks to boost capital to be able to withstand global shocks. The move also comes amid heightened regulatory scrutiny of riskier mortgage lending as home prices have boomed in cities including Sydney and Melbourne. APRA has flagged further changes to come, including a discussion paper due later this year on mortgage-risk weights.

"APRA's objective in establishing unquestionably strong capital requirements is to establish a banking system that can readily withstand periods of adversity," said Wayne Byres, chairman of the regulator.

He said the new measures would ensure banks can handle stresses, reducing any need for public-sector support.

The new benchmark would help nail down capital targets for the country's big banks, after a sweeping government-backed review of the financial industry published in late 2014 that recommended the lenders have capital ratios within the top quartile of their international peers. That spurred several regulatory changes, including a call to lift capital reserves held against home loans that prompted the major banks to raise more than 20 billion Australian dollars (US$15.8 billion) collectively through new equity and retained earnings.

APRA said the four largest banks-- Commonwealth Bank of Australia Ltd., Westpac Banking Corp., Australia & New Zealand Banking Group Ltd., National Australia Bank Ltd.--will need to have common equity Tier 1 capital ratios of at least 10.5%, effectively meaning they will need to raise capital levels by about 1 percentage point on average from levels at the end of December. CET1 is considered the highest-quality capital, and is the most expensive for banks to hold.

Smaller banks will effectively have to increase capital requirements by about 0.5 percentage point on average, the regulator said, adding that most of them could likely meet that in part through surpluses already held.

The banks will be given until January 2020 to meet the new benchmarks.

Australia's major banks emerged from the global financial crisis relatively unscathed, helped in part by the support of government guarantees, and managed a string of record profits that have only recently come under pressure from higher funding costs, heightened lending competition and pockets of loan stress largely linked to the resources industry.

Concerns have built in recent months over the outlook for revenue and the sustainability of dividend payouts, as the housing market that helped drive earnings growth has shown signs of cooling after banks tightened mortgage requirements for foreigners and edged up home-loan rates in response to regulator demands to cool lending to property speculators. The big banks have also warned they face being squeezed in the coming years by a fresh tax on their liabilities aimed at helping the federal government plug its budget deficit.

The big banks' shares rallied more than 3% on Wednesday, rebounding from weakness in recent weeks in part on concerns the capital measures would prove more onerous.

"The banks are fairly well placed to get to APRA's minimum requirements organically over the next few years," said Omkar Joshi, a portfolio manager at Regal Funds Management in Sydney. If the benchmark covers any future shifts in mortgage-risk weights, then bank dividends appear safe even with pressure on earnings, he said.

Analysts said they expect the major banks to overshoot the minimum requirement by adding their own buffers. This means the Big Four lenders would need to add up to A$8 billion over several years, which should be achieved without needing to turn to dilutive capital raisings. ANZ is ahead of its peers, having sold off a string of assets and with plans to sell more businesses, including its Australian wealth operations, while UBS estimates Commonwealth Bank faces the largest shortfall at about A$4.2 billion.

Like the other banks, Commonwealth Bank said it was well-placed to meet the requirements and would provide more details in its annual results next month. ANZ said it was comfortable with its capital position and estimates its CET1 ratio was about 10.5%, taking into account asset sales in Asia that were waiting on regulatory approvals.

In a research report, Macquarie Securities estimated the capital accumulation would dilute the big banks' earnings by 2%-3% in the coming years, within its current projections. Its parent, Macquarie Group Ltd., said the CET1 capital ratio of its banking division stood at 11.1% at the end of March.

Write to Robb M. Stewart at robb.stewart@wsj.com

(END) Dow Jones Newswires

July 19, 2017 00:45 ET (04:45 GMT)

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