Analysts are split on new capital rules for banks

The banking regulator has failed to end speculation in the market about incoming capital rules for banks.

APRA chairman Wayne Byres. Picture: Britta Campion

The banking regulator has failed to end speculation in the market about incoming capital rules, with investors facing uncertainty about the sustainability of lofty dividend payments.

After an update from Australian Prudential Regulation Authority chairman Wayne Byres on Friday, Macquarie analysts said the big banks were likely to be spared from having to raise substantial capital though big ­equity raisings next year.

“The tone of his speech suggests that ultimate capital increases are likely to be less material than current market expectations,” analyst Victor German told clients.

UBS analyst Jonathan Mott said that while large equity raisings next year were probably off the table, APRA was clearly not “backing down on (the) capital quantum” the banks would ultimately require.

Higher capital levels make banks safer by reducing leverage, but lower their returns. Commonwealth Bank, Westpac, ANZ and National Australia Bank last year raised about $17bn in fresh equity from shareholders to meet APRA’s higher mortgage capital requirements, which were recommended by the financial system inquiry.

Their average return on equity dived 194 basis points to 13.8 per cent as dividends were largely held flat, increasing the proportion of profits paid to shareholders to levels many analysts believe are unsustainable.

Two years since the FSI ­recommended banks have “unquestionably strong” capital levels, Mr Mott said the big banks had raised more than $20bn in capital.

However, he noted that Mr Byres said APRA would base “unquestionably strong” on the banks’ capital positions against rating agencies’ measures of capital strength, plus stress tests that might be similar to the US Federal Reserve’s comprehensive capital analysis and review.

“We continue to believe that around $40bn in common equity tier one capital will need to be raised by the banks through this prolonged process,” he said.

With Mr Byres revealing the final rules remained a year away, Mr Mott said pressure on dividends would continue to “intensify” and the banks would struggle to “justify” repricing loans in their favour to offset higher capital requirements.

Mr Byres on Friday said that despite “much horse trading to do”, global rule-making body, the Basel Committee, was likely to agree on its latest package of reforms in January, as expected.

Finalisation of the reforms, dubbed Basel IV, would allow APRA to “think through how and where we build further resilience into the new Basel framework to deliver ‘unquestionably strong’ capital ratios”, he said.

A major part of Basel IV is overhauling banks’ “risk weighting” of loans through their own internal modelling systems, fearing they can be gamed to alter capital ratios and are too opaque.

Mr Byres said 2017 would be a year of consultation. “We don’t expect to have final standards before this time next year,” he said.

“And even if that is the case, they would not take effect until at least a year after that.

“Capital accumulation remains the appropriate course for most (banks) but, with sensible capital planning, the actual implementation of any changes should be able to be managed in an orderly fashion.”

The major banks are likely to welcome the comments, having previously bet on being given plenty of time to build capital levels. But the investment community has been divided between circumspect bears who expect the banks to have to raise billions of dollars and those who are more sanguine.

Mr German argued Mr Byres’s comments were favourable for the major banks “relative to current expectations”, holding his “overweight”, or buy, recommendation for the sector.

“While throughout this year we held a view that banks will not need to raise capital and will be able to organically accumulate $3bn-$4bn, it appears that Mr Byres remarks could be perceived to be more favourable relative to our current forecast and to market’s expectations,” he said.

“Diminished uncertainty on capital should support dividend sustainability and returns.”