Banks will be tied to global rule changes, analysts warned
DAVID Murray’s financial system inquiry has left Australia’s big four banks at the whim of constantly changing global capital rules, analysts say.
“By targeting a dynamic benchmark, there is a risk the Australian banking system enters a global ‘race to the top’ of capital levels,” said UBS analyst Jonathan Mott, adding offshore banks were likely to continue to build capital through 2015-16.
“The outcome of this may be higher capital requirements than the market expected, to achieve an ‘unquestionably strong’ system.”
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Analysts at Goldman Sachs and Merrill Lynch agreed making the banks “top quartile” globally tied them to changes in various economies and that it remained unclear how, and if, the Australian Prudential Regulation Authority would implement the inquiry’s recommendations.
But Mr Murray, a former Commonwealth Bank chief, yesterday said the banks must be among the strongest in the world because Australia relies on funding from global capital markets and the economy would not be able to respond to future crises as well as it did to the global financial crisis.
Several experts agreed the banks could not afford to fall behind global rivals.
Ahead of the stockmarket opening today, Goldman and Merrill breathed a sigh of relief and told clients that the up to $32 billion in capital the “big four” banks might need to raise due to the inquiry’s recommendations was not as bad as feared.
Andrew Hill, Merrill’s lead banking analyst, said while the inquiry’s recommendations left “some uncertainty” around the banks’ key capital ratio targets, there was “no pressing near-term need” for the banks to raise equity from shareholders.
He added the proposed higher “risk weights” on mortgages could entirely boost the big four’s common equity tier one (CET1) capital requirements by between $13 billion and $21 billion and that the inquiry suggested this should be taken into account when considering changes.
“We think the stocks should rally in response,” he said. Merrill believes the banks will need to raise between $9 billion to $32 billion, compared with its initial fears of $19 billion to $52 billion.
Goldman’s Andrew Lyons agreed “the risk of a more onerous outcome is now gone” and the banks will be able to raise his estimated $25 billion shortfall through their dividend reinvestment plans.
He added the majors “have a good track record of offsetting the returns impact of additional capital”.
Mr Lyons said the report might also spur deal making, given National Australia Bank, ANZ and Commonwealth Bank have options to raise capital through asset sales.
After a year of probing the system, the Murray report yesterday said the big four must have higher capital levels — preferably through top notch, but expensive, CET1 — so that they are “unquestionably strong”.
Despite intense lobbying by the banks that they are already among the best capitalised in the world, the Murray financial system inquiry deemed the big banks were “not currently in the top quartile”.
It said the major banks’ CET1 ratios were at 10 per cent to 11.6 per cent, compared with the top quartile at 12.2 per cent.
The report also recommended the big four be subject to sharply higher “risk weights” on mortgages of between 25 to 30 per cent, potentially shaking up the $1.3 trillion mortgage market by ensuring “competitive neutrality” for smaller banks.
