Westpac chief Brian Hartzer eases capital raising concerns

The Australian 12:00am November 23, 2016

Andrew White

Ahead of global regulators finalising new rules for bank capital, Westpac chief executive Brian Hartzer says he is optimistic there is “nothing material’’ requiring banks to complete big new equity raisings.

Mr Hartzer, meeting investors in Asia and Britain this week, told The Australianrecent signals from APRA chief Wayne Byres and ­European central banks suggested there would not be a lot of change to bank capital standards. Two weeks ago, Mr Byres said whatever the outcome of a ­meeting of the so-called Basel Committee on international bank regulation next week, the Australian Prudential Regulation Authority would not have new local rules in place by the end of next year, and would then need another year to implement them.

Bank shares have rallied strongly since the election of ­Donald Trump two weeks ago on expectations he would lead a roll-back of years of bank regulation since the global financial crisis.

European central banks have been resisting demands for ­further capital rules, with Andreas Dombret, a member of the executive board of the Bundesbank, warning this month it would not “reach an agreement at any price” on new capital rules.

Ahead of the Basel Committee’s meeting next week, the Bank of International Settlements has been stepping up the case for bank regulation, with a paper this month estimating the post-crisis reforms known as Basel III “can be expected to generate sizeable macroeconomic net benefits, even after the implied changes to bank business models have been taken into account’’.

The paper counters frequent bank criticism that post-GFC regulation has been a drag on the economy and a disincentive for much-needed business lending to stimulate sluggish growth.

But in more forceful comments last week, BIS general manager Jaime Caruana said regulatory reforms “alone cannot explain the challenges facing the banking sector”. He argued the higher capital levels demanded by creditors and investors after the GFC “sharpened” the perception of how risky the industry was.

“Banks could themselves go a long way towards lowering their cost of debt funding if they reduced their dividend payouts and retained more of their profits, thereby adding to capital,” Mr ­Caruana said.

Demands for extra capital to reduce leverage in the banks has spooked investors, who fear it will reduce world-leading returns on equity of about 15 per cent. A year ago, Australian banks hit investors for $16 billion of fresh equity to meet new mortgage capital rules and analysts had estimated the banks would have to line up billions more next year.

But Mr Byres’ speech this month indicated the banks would have more time to raise capital levels, including through retained earnings and dividend reinvestment programs.

In meetings with investors in Singapore last week, and in London and Edinburgh this week, Mr Hartzer has been soothing concerns another round of big capital raising is coming. “The impression we are getting out of Basel is that it is likely to be not a lot of change from here,’’ Mr Hartzer told The Australian on the sidelines of the Morgan Stanley Asia Pacific Investment Summit in Singapore last Friday.

“The European banks seem to be under a certain amount of pressure to support the European economy, and so the sense we are getting is that the Basel Committee is backing off a little bit on requiring further capital there. And since Australian banks are already, we would argue, unquestionably strong, the APRA standards are already higher than the minimum standards out of Basel, so ... we are already as Australian banks in a strong position.’’

The comments are the first by a major bank chief executive since Mr Byres’ speech.

Banks are not solely bound by the Basel rules, and APRA has been charged with implementing the global rules to ensure Australian banks’ capital levels are in the top quartile of international peers, or “unquestionably strong’’.

In his speech, Mr Byres said that while there would be a “material reduction in capital requirements’’ by applying the Basel rules to Australian banks, APRA would not be following that course.