Chunky capital concerns over big four banks' Kiwi arms

Australian Financial Review 14 Jan 2019 12:15 AM

Sarah Thompson, Anthony Macdonald

As the big four banks tackle Australia's banking regulator and how exactly it wants them to raise another $75 billion capital, there is another storm brewing across the Tasman.

And while the numbers out of New Zealand may be smaller, bankers reckon the storm front is both more fierce and more likely to spark equity raisings or asset sales than regulator changes back home.

The big four banks are likely to need about another $15 billion to $20 billion in tier one capital in their Kiwi subsidiaries to keep banking in New Zealand.

The Reserve Bank of New Zealand wants Australia's big four - which together account for nearly 90 per cent of NZ's bank assets - to lift tier one capital to 16 per cent, from about 13 per cent.

RBNZ's proposal isn't due to be finalised until June, however banks reckon the writing is on the wall.

Whatever the final outcome, they're going to need to start building capital levels. And while they may be given five years to make the jump, the build would need to begin shortly.

Fund managers reckon the banks have four options to raise the capital; retain more profits in their NZ subsidiaries; launch equity raisings; sell assets; re-think the size of their NZ loan books.

All options are expected to be considered. It's obviously not an ideal time to go to shareholders with big rights issues. Bank shares are down 15 per cent in the past year, on average, while investors are worried about the market more broadly.

And retaining more profits in their NZ subsidiaries would likely put pressure on group dividends, which may see the pendulum swing in favour of asset sales.

The other as-yet-unanswered question is how APRA would treat increases in NZ capital back home. Will the NZ requirements end up as a capital re-allocation inside the banks, or something more?

It's one fundies and bankers will be watching closely this year. The end result is likely to be more pressure on each bank's return on equity - Goldman Sachs analysts are talking about a 1 percentage point haircut from existing ROE levels, which range from 10 to 14 per cent.

ANZ Banking Group is likely to be the most impacted in NZ with a $5.8 billion gap, on Macquarie's numbers, ahead of National Australia Bank ($4.8b), Westpac Banking Corp ($3.5b) and Commonwealth Bank of Australia ($4.2b).