Major banks’ top tier capital falls as new regulations loom
The Australian 12:00am June 1, 2016
Michael Bennet
The major banks’ top tier capital base has fallen for the first quarter in six years, reducing the sector’s starting point ahead of a range of regulatory headwinds.
Data from the banking regulator revealed that in the March quarter the big four lenders’ tier one capital levels fell to $178.6 billion, down 3.5 per cent from the end of December.
It marked the first decline since the beginning of the so-called Basel III reforms in 2013 that altered how capital was calculated.
Including data before the reforms were put in place to ensure banks globally could better handle another major crisis, the decline was the first since the September quarter of 2010.
It also reverses the spike late last year following the majors’ almost $20bn of equity raisings.
While the capital decline was mostly due to National Australia Bank’s sale of British subsidiary Clydesdale Bank during the quarter, the majors are facing an imminent hit from the regulator’s higher mortgage “risk weights” coming into effect on July 1 that will reduce their common equity tier one ratios.
A tsunami of other changes — some not yet determined — are set to lash the banks, including when the next global “Basel 4” rules are set in stone by the end of the year and how Australia’s banking regulator implements the final pieces of the government’s financial system inquiry.
“We expect the capital build to resume in 2017,” Morgan Stanley analyst Richard Wiles told clients this month.
He was surprised the banks didn’t “make more effort” at the recent first-half results to improve CET1 ratios.
During the first half, NAB, ANZ, Westpac and Commonwealth Bank increased their aggregate CET1 capital ratios rising by 43 basis points to 10.1 per cent of risk-weighted assets, according to KPMG.
But the looming mortgage risk-weighting changes and dividend payments will reduce their CET1 capital ratios significantly and several analysts believe the minimum requirement will jump to at least 10 per cent, from 8 per cent.
CLSA analyst Brian Johnson, who expects the big banks to need CET1 ratios of 10.5 per cent, said the regulatory reform agenda for the banks centred on stricter rules around not just capital, but also liquidity, funding and culture.
Despite last year’s capital raisings, he said the banks were still $33bn short of CET1 capital, a major drag on returns if they are forced to plug the hole.
The Australian Prudential Regulation Authority hopes for clarity on several reforms by the end of the year, followed by consultation next year and implementation in 2018.
The drop-off in the sector’s capital base came as separate data from APRA showed the big four banks’ commercial property exposures increased 2.1 per cent in the March quarter to $213bn.
After heavy losses in the early 1990s and the GFC, the banks’ commercial property lending is viewed as higher risk.
The Reserve Bank has recently warned of growing risks related to office towers in cities exposed to the mining slowdown and apartment overbuilding on the east coast.
Across the entire banking system, commercial property exposures within Australia jumped 10.4 per cent in the past year, faster than the 8.7 per cent increase in housing loans.
New housing loans approved in the March quarter fell 1.2 per cent to $81.7bn.
“The increase in supply of units, coming at a time of tightening in lending conditions, could raise settlement risk,” Standard & Poor’s warned yesterday, singling out Melbourne and Brisbane and off-the-plan developments.