The prudential regulator’s new stipulations around bank core equity will lead to modest earnings-per-share upgrades for the big players and capital management including rolling dividend reinvestment plan buybacks for ANZ Banking Group and Commonwealth Bank of Australia, analysts at Credit Suisse say.
On Wednesday the Australian Prudential Regulation Authority lifted the target for major Australian banks’ equity capital ratio to “at least 10.5 per cent”, up from current levels of common equity tier 1 capital (CET1) of around 9.5 per cent, in order to meet the “unquestionably strong” benchmark set down by the financial system inquiry. The regulator also raised the capital thresholds for the regional banks as part of the changes, which need to be implemented by 2020.
“We expect this announcement will see a modest immediate relief rally on the back of a benign announcement / clarity as to an important capital reform,” Credit Suisse analysts led by Jarrod Martin and James Ellis said in a note to clients.
“We could also see small consensus EPS upgrades, factoring capital management (say, rolling DRP buybacks) into both ANZ and CBA consensus estimates especially (we already have DRP buybacks throughout the forecast period for ANZ).
“Capital build from the major banks from here could be a positive surprise (eg institutional books contracted in 1H17), thereby allowing consensus to factor in incrementally more capital management over time. However, sector valuations appear fair absolute (inexpensive market relative), and consensus upgrades are likely to be modest, so we would not overstate our positive share price reaction.”
Credit Suisse also pointed out that Bendigo and Adelaide Bank fared worse than its regional peer Bank of Queensland.
Bendigo Bank put out a statement on Wednesday noting the new capital requirements and its obligation to raise its CET1 ratio by 50 basis points under the new rules.
“Amongst the regionals, assuming a >8.5 per cent target now, BOQ (9.27 per cent1H17) appears comfortable already, but BEN (7.97 per cent 1H17) appears short (we acknowledge they are pursuing advanced accreditation),” Credit Suisse added.
“By stock, we see this as relatively more positive for ANZ followed by CBA. Amongst the regionals, we see this as a relative negative for BEN.”
Analysts at UBS were keen to point out to clients that APRA hadn’t mentioned changed to mortgage risk weights on Wednesday. They determine the amount of capital banks hold against their loan books.
“This discussion paper did not include changes to mortgage risk weights or the impact of the Finalisation of Basel III (Basel 4). APRA will release a discussion paper on these proposed changes later this year,” they said.
“However, there remains some debate as to whether APRA’s ‘unquestionably strong’ buffers announced this morning incorporate expectations for higher risk weights (APRA stated “reforms will be able to be accommodated within the calibration set out in this paper”). That said we believe the market would still expect the Major Banks’ CET1 ratios to settle between 10.75 per cent to 11.0 per cent post higher risk weights to be considered ‘unquestionably strong’.”
UBS estimates thea capital shortfall in the sector at $7.9 billion rising to $17.7 billion post higher risk weights.
“Our initial calculations suggest the sector’s capital shortfall to reach 10.75 per cent CET1 is ~$7.9 billion. However, this rises to ~$17.7 billion assuming mortgage risk weights rise from an average of 25 per cent to 30 per cent.
“At an individual bank level: CBA has the largest capital shortfall at ~$4.2 billion (rising to ~$6.5 billion assuming higher mortgage risk weights); WBC’s (Westpac’s) shortfall is ~$1.5 billion (~$5.4 billion including higher risk weights); NAB (National Australia Bank) ~$1.7 billion ($3.5 billion including higher risk weights); and, ANZ ~$490 million (~$2.3 billion post higher risk weights).