NAB to gain most from APRA’s bank capital reforms

The winners from APRA’s new capital framework will be banks with a relatively heavy exposure to business lending and a smaller mortgage book

When COVID-19 hit, many banks had sufficient capital depth to help the economy on its path to recovery. Picture: Hollie Adams

Winners and losers will emerge from the prudential regulator’s new capital framework, although the impact on the overall sector is likely to be neutral, according to analysts.

UBS analyst Jon Mott said in a note that the Australian Prudential Regulation Authority’s aim was to increase flexibility through the business cycle, finalise its response to the 2014 financial system inquiry, and ensure compliance with the Basel III global accord.

“Overall, we would characterise these proposals as being net neutral for the banks,” Mr Mott said.

“All listed banks which complied with APRA’s previous ‘unquestionably strong’ framework will have sufficient capital to comply with these new proposals.”

With a heavy skew to mortgages – about 65 per cent of total assets – in bank balance sheets, APRA is targeting an increased capital requirement for higher-risk exposures, including investment property and interest-only loans.

Loans with high loan-to-valuation ratios and no lenders’ mortgage insurance will also attract higher capital requirements.

On the other hand, lending to SMEs, commercial real estate and corporate and commercial loans will benefit from lower risk-weights, or the amount of capital to be held against loans.

Importantly, total capital allocated to housing will lift from 34 per cent to 40 per cent of credit risk-weighted assets for the major banks.

APRA estimates that risk-weighted assets should fall by 10 per cent for the majors, and seven per cent for the smaller lenders using standardised models to calculate their risk-weighted assets.

Mr Mott said Westpac was likely to have the smallest decline in risk-weighted assets, and lowest boost to its common equity tier one ratio.

This was because of its larger exposure to investment property – 37 per cent of mortgages – and interest-only loans (21 per cent).

CBA was also overweight in mortgages, reducing its benefit from the new framework.

However, National Australia Bank could potentially see the most significant benefit to its risk-weighted assets because of its status as the nation’s biggest business bank.

“ANZ should benefit from a smaller mortgage book, and less exposure to investment property and interest-only,” Mr Mott said.

“Overall, we see these proposed capital changes as net neutral for the banks, although increasing the stated CET1 ratios towards internationally comparable levels is positive.”

Major-bank stocks were a mixed bag on Wednesday, with CBA the clear leader, climbing $1.37, or 1.7 per cent, to $83.18.

NAB was up 13c to $23.44, Westpac retreated 7c to $20.07, and ANZ was down 10c to $23.30.

APRA chairman Wayne Byres said the proposed reforms would consolidate the strong capital position of the Australian banks and provide further confidence in the long-term resilience of the system.

“The groundwork of previous years meant that, when COVID-19 hit, the Australian banking industry had sufficient capital depth to support customers, maintain the supply of credit and help the Australian economy on its path towards recovery,” Mr Byres said.

“These proposed changes will embed the ‘unquestionably strong’ capital position that has been achieved by the banking sector into a regulatory capital framework that is more flexible and responsive at times of crisis.

“Progressing these reforms in a timely manner will deliver a robust, competitive banking system that can continue to fulfil its critical role when our community is confronted by the challenges of the future.”