Big banks on war path over NZ central bank’s bid to raise minimum capital

The Australian 12:00am May 9, 2019

Richard Gluyas

The nation’s big four banks are on a collision course with the Reserve Bank of New Zealand, and judging by the hostile rhetoric there’s no sign of the combatants taking a backward step.

Final submissions are due by May 17 on the RBNZ’s proposal to increase minimum capital requirements by $13 billion-$16bn for the three banks that reported half-year results over the last week — ANZ, National Australia Bank and Westpac. The central bank is due to make a final decision by September.

The stakes are enormous given the big four earn 15 per cent of their combined profit, or $4.4bn, in NZ — a market where they control 88 per cent of industry assets.

The combative tone adopted by the banks, set by ANZ chief executive Shayne Elliott when he kicked off the reporting season on May 1, was fully supported yesterday by Westpac chairman Lindsay Maxsted.

On the sidelines of an investor conference in Melbourne, Maxsted told Four Pillars that implementation of the reforms would “severely” lower Westpac’s return on equity in NZ.

“All of us, not just my bank, would have to look at the situation in terms of: ‘Well, how do we deal with this — is it something that our shareholders just take on the chin?’” he said.

“That’s not conceivable, so the main thing we need to work through with the authorities is to make it very clear that we think we’re adequately capitalised in NZ, and what the implications would be if we’re forced to hold capital over and above what we’ve set aside.

“Then you have to look at how much you want to invest (in NZ), how do you price, and who do you lend to. All those things are in play.”

The trans-Tasman shootout received remarkably little coverage in the reporting season, which was not surprising given the focus on the Australian housing market and the slowing economy.

In a nutshell, though, RBNZ governor Adrian Orr — no relation to Hayne royal commission inquisitor Rowena — wants to lift the minimum capital requirement for systemically important banks from the current level of 10.5 per cent to 18 per cent.

Higher-quality tier-one capital would be raised from 8.5 per cent to 16 per cent.

The RBNZ has downplayed the impact, arguing that the major banks’ NZ subsidiaries were currently operating in NZ with about 12 per cent of tier-one capital, on average.

The banks, it said, could meet the new requirements by retaining 70 per cent of their expected profits over the proposed five-year transition period, without hitting the brakes on credit growth.

The central bank has pitched the reforms not just to policymakers and the banks but to mums and dads as well in a benign, “non-technical” summary of its consultation paper.

If banks in NZ fail, it says, some people might lose money and some might lose their jobs, but in the end everyone would bear the cost of bank failures.

“That is why we want to make the chances of this happening very small — so small that a banking crisis in NZ shouldn’t happen more than once every 200 years,” the RBNZ explains.

Instead of soothing the banks, the consultation paper inflamed tensions.

As the largest bank across the ditch, ANZ has the most to lose. Implementation of the reforms as drafted would mean a capital call of $NZ6bn-$NZ8bn ($5.6bn-$7.5bn) over the next five years — about 50 per cent more than the bank already holds.

The figures for NAB and Westpac are $NZ4bn-$NZ5bn and $NZ3.5bn-$NZ4bn.

It was almost like Orr was in the room when Elliott said that “clearly, the bank has options”.

“We have options about the amount of capital that we put into NZ, how we deploy that capital in NZ, and what returns we require,” he said. “I mean, I think it’s as simple as that.

“(But) then there’s a long period of time to comply, and we feel that five years will be sufficient for us to rebalance the portfolio.

“We’ve shown that we’re not shy of taking hard decisions. We actually have a responsibility to act responsibly with our shareholders’ capital, and we will do so.”

Clearly the banks aren’t bluffing, and neither is Orr.

In fact, we’ve seen this movie — or a very similar one — in the recent past, when ANZ flexed its muscles against the Weatherill government in South Australia over its plan to slug the banks with a $370 million budget repair levy.

ANZ’s response was to threaten legal action and bombard the airwaves with attack ads ahead of the March 2018 election. Premier Jay Weatherill withdrew the measure in November 2017, minutes before the state’s Legislative Council was due to reject the budget measure for a second time.

It’s more complicated this time.

Contrary to the situation in SA, the industry’s antagonist is an independent central bank, not a government sensitive to the whims of voters in an election campaign.

It also beggars belief that the RBNZ would carefully craft a consultation paper, only to abandon its core proposition when challenged. “I can’t see them budging, so the question is where do we go now,” a senior banker said.