APRA lifts bank capital requirements, may push up interest rates


July 19, 2017 10:49:57

The bank regulator has announced moves to make all banks safer, with the big four bearing the brunt of increased capital requirements to make them “unquestionably strong”.

Key points:

  • APRA to raise minimum tier one capital requirement for big four banks to 10.5pc
  • Regulator giving banks until January 1, 2020 to comply
  • Bank share prices rally strongly after weakness earlier in the week

The Australian Prudential Regulation Authority (APRA) has outlined its new “capital adequacy” targets in an information paper, and will require a 150-basis-point (1.5-percentage-point) increase in the minimum safety reserves that must be held by the big four banks and Macquarie.

Smaller banks will see a smaller 50-basis-point increase in the so-called tier one capital that they must hold in reserve to offset potential losses.

However, the big four banks are generally holding considerably more than the current minimum capital requirement, which APRA said means they will need to increase their tier one ratios by an average of around 100 basis points over December 2016 levels.

In fact, ANZ has told the ASX that it already meets the new big four standard of 10.5 per cent, once a range of previously announced asset sales are finalised.

“Together with the benefits from announced but yet to be completed asset sales, ANZ is well placed to achieve the strengthened capital standards, and to do so well ahead of the schedule outlined by APRA,” noted the bank’s chief financial officer Michelle Jablko.

That has been reflected in the bank’s share price in early trade, which had rebounded 2.7 per cent to $29.05 in very early trade following a steep decline yesterday.

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Westpac appears to have a little bit more work to do, saying its tier one capital ratio was at 10 per cent by the end of March this year.

However, APRA’s target appears to be lower than many investors feared, with Westpac joining the other major banks with gains between 2.5 to about 3.5 per cent.

Further reforms ahead

The APRA announcement gives banks, and their investors, some certainty about where the goalposts sit for their saftey reserves.

“Todays announcement is the culmination of nearly a decade’s financial reform work aimed at building capital strength in the financial system following the global financial crisis,” noted APRA chairman Wayne Byres in a statement.

“Capital levels that are unquestionably strong will undoubtedly equip the Australian banking sector to better handle adversity in the future, and reduce the need for public sector support.”

Banks will have until January 1, 2020 at the latest to implement the increased requirements.

This will involve them retaining some of their profits or selling new shares to boost their reserves, either of which could see the amount of dividends paid per share fall or grow more slowly.

It may also involve recovering some of the extra cost and maintaining profitability by increasing interest rates on loans.

This trend may be reinforced when APRA releases further guidance later this year that will detail moves to rate residential mortgages as riskier than they are considered currently, thus requiring more reserves to offset potential losses.

However, Mr Byres is not anticipating any major disruption from these changes.

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“Australia has a robust and profitable banking industry and APRA believes this latest capital strengthening can be achieved in an orderly way,” he added.





First posted

July 19, 2017 08:44:42